Finance Bill

Public Bill Committee, 19 June 2012.

Peter Bone (Conservative, Wellingborough)

Before we start, I should explain that it is proposed that we consider the whole of parts 2 and 3 of the Bill, including associated schedules and all amendments, in one debate on the question that clause 55 stand part of the Bill. Once we have disposed of clause 55, I shall ask the Committee’s leave to put the remaining questions to the Committee in groups to save time. If any hon. Member wants to request a separate decision on any clause, schedule or amendment, it will be helpful if they give me advance notice, perhaps by sending a note.

Clause 55 - Overview

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Clauses 56 to 125 stand part.

Government amendments 135 and 136.

Clauses 126 to 128 stand part.

Government amendments 137 and 138.

Clause 129 stand part.

Government amendments 139 to 143.

Clauses 130 to 146 stand part.

Government amendment 144.

That schedule 16 be the Sixteenth schedule to the Bill.

Clause 147 stand part.

Government amendment 145.

That schedule 17 be the Seventeenth schedule to the Bill.

Clauses 148 to 150 stand part.

Amendment 195, in clause 151, page 89, line 20, at end add—

‘(7) Consultation shall be undertaken with interested parties prior to the enactment of regulations under this section.

(8) The Chancellor of the Exchequer shall review the impact of the regulations under this section on friendly societies and shall lay a report of his review in the House of Commons Library.’.

Clause 151 stand part.

Amendment 196, in clause 152, page 90, line 2, at end add—

‘(6) Consultation shall be undertaken with interested parties prior to the enactment of regulations under this section.

(7) The Chancellor of the Exchequer shall review the impact of the regulations under this section on friendly societies and shall lay a report of his review in the House of Commons Library.’.

Clauses 152 to 176 stand part.

That schedule 18 be the Eighteenth schedule to the Bill.

Clause 177 stand part.

That schedule 19 be the Nineteenth schedule to the Bill.

Clauses 178 and 179 stand part.

Mark Hoban (Conservative, Fareham)

Mr Bone, it is a pleasure to serve under your chairmanship on this sunny Tuesday morning. We can make huge progress in this morning’s sitting by debating over 120 clauses. I am sure that you will be relieved to know that I shall not be discussing each clause and schedule in detail individually, but if members of the Committee so wanted, I am sure that I could arrange for that to happen. However, I thought that I would try to set out why we are seeking to replace the existing tax regime for life insurance and what the benefits of the new regime are. Importantly, I also want the Committee to have confidence in that approach, and I want to discuss the consultation that happened between the Treasury and the insurance sector to get to this point.

Clauses 55 to 179 establish a new tax regime for life insurance companies and friendly societies—friendly societies are covered in part 3 of the Bill. The clauses represent a wide-ranging and fundamental revision of both the basis on which life companies’ taxable profits are computed and the detailed rules by which those profits are taxed. The changes will enhance the effectiveness of the tax system and bring the taxation of life companies more in line with that of other companies, as well as with the commercial realities of the life insurance business. In addition, the changes support the Government’s policy of reducing complexity in the tax system.

The UK insurance industry makes an important contribution to our economy. It is the largest in Europe and the third largest in the world. Life insurance companies play a vital role in providing pensions, life and health protection, and investment products. The Association of British Insurers estimates that, in 2010, there were some 21 million pension policies in force, along with 13 million life protection policies and 10 million savings policies. The insurance industry is also an important source of Government revenue, with life insurance companies paying £1.2 billion in corporation tax in 2009, including £720 million paid on the behalf of policyholders.

As I have said, this is a wide-ranging revision of the tax rules for life companies. The package of changes amounts to some 127 pages of legislation in total, with the new core regime contained in fewer than 80 pages. To put that in context, we are repealing some 147 pages of existing primary legislation spread over 22 Acts. There will also be significant reductions in the 80 pages of secondary legislation that support the existing regime. For instance, the regulations concerning friendly societies will be reduced from 38 pages to just seven.

Let me give the Committee some background. The changes are made necessary in part by the solvency II directive—an EU directive looking at the solvency of insurance companies—which triggers a need to change the basis of life insurance taxation in the UK. Currently, one of the unique features of the taxation of life companies is that taxable profits are not, as is the case for companies generally, based on their accounting profits. Instead, taxable profits are derived from regulatory returns made to the Financial Services Authority. Under solvency II, the regulatory returns made by insurance companies to the FSA will no longer provide the information necessary to make the current basis of taxation work. Change is therefore essential.

I will now set out the main areas where we are making changes and explain how we have worked with industry groups to ensure that the rules are workable. The first area is trading profits, which will be calculated on the basis of life companies’ accounting profits. This is a significant change and is welcomed by the industry. It will simplify life company taxation and bring it into line with general tax rules.

Secondly, life companies are uniquely subject to the income minus expenses, or I minus E, basis of taxation. This ensures that tax is collected both on the profits and on the investment income accruing for the benefit of policyholders. This will continue but, unlike now, the scope of I minus E will be restricted to the type of business where it is appropriate to tax shareholder profit and policyholder income together. Life protection business such as term assurance, which does not attract significant investment return, would therefore be excluded from I minus E. This is acknowledged by the industry as a sensible rationalisation. It would simplify the system and eliminate distortions which can lead to competitive disadvantage for some companies.

The third main change is that the system will be simplified further by amalgamating two of the three existing categories of insurance business recognised for tax purposes. The new combined category will comprise what is currently “gross roll-up business”, such as pensions and annuities, and home and health insurance, including critical illness policies. It will also contain life protection business written under the new regime. Again, the industry firmly supports this change.

The fourth change concerns the allocation of income gains and profits. The allocation of income gains and profits between the categories will in future be determined by reference to the commercial activities and processes of individualcompanies. Currently they are determined by statutory formulae which are often arbitrary in their impact and do not reflect commercial reality. Again, the industry very much welcomes this alignment of tax with the commercial nature of the transactions. The fifth and final point is that in a number of areas life companies will be brought within the rules applying to companies generally, simplifying the tax system greatly by reducing the need for special provisions for the sector.

On the question of the tax impact of the changes, those cannot be assessed with certainty. In particular, the tax yield, including transitional arrangements, is sensitive to future movements in equity and bond markets. The Office for Budget Responsibility has forecast the market developments, and that has been used to help project the tax impact of these changes. On the basis of these projections we expect that over the first four years of the new regime, which is the forecasting horizon that we use, the changes will result in an increase in tax receipts as set out in the Red Book.

This is work that the Treasury has conducted in collaboration with the industry and other stakeholders, and their contribution has been vital to ensuring that we get the regime right. The clauses have been subjected to extensive consultation and the process has attracted some positive comments across the board. The Association of British Insurers said that it would like to express its

“appreciation of the consultation process with HMRC which has been open, thorough and very professionally conducted.”

Informal consultation started in 2009 and since then we have maintained close co-operation with the insurance industry and other stakeholders through a series of joint working groups. These working groups have considered the complex and difficult technical issues in detail, and—this relates back to Opposition amendments—we have set up a forum to identify and consider particular concerns of friendly societies and mutual life assurance companies. The work of these groups is continuing and will help to ensure a smooth transition to the new regime.

We have issued two consultation documents and held a series of 13 well-attended open meetings to consider aspects of the new regime. There has been ongoing dialogue with individual insurers, representative and professional bodies and industry advisers. Throughout, consultees have contributed fully and constructively. This has greatly added to our understanding of the issues, and many of the changes we are making owe a great deal to suggestions we have received.

Concerns have been raised in a number of areas, and significant adjustments have been made to the legislation in the light of representations. These include the relief for policyholder deferred tax provisions, the transitional arrangements, the targeted anti-avoidance rules and the carrying forward of trade losses into the new regime. We have sought to accommodate industry concerns, where possible, without putting the Exchequer at risk or introducing unnecessary complication. Overall, the industry has welcomed the collaborative approach we have taken to the consultation process and supports the regime we are introducing.

Since the Bill was introduced, we have continued that consultation, which has highlighted the need for Government amendments to address points of detail in four areas. None of those amendments represents a change of policy; they are technical adjustments to ensure that the rules will operate effectively and as intended. In all but one case, the need for amendments was identified by consultees. The amendments have been discussed with industry representatives and have benefited from the comments received.

The amendments may be placed into four groups. Amendments 135 and 136 amend clause 126, which provides appropriate relief where losses on loan relationships are reflected in both the trading result and the I minus E result. The need for a restriction of losses is acknowledged by the industry, but we received representations that the rule, as currently framed, could restrict relief in certain circumstances where that would be unjustified. The amendments eliminate that possibility.

Amendments 137 to 143 amend clauses 129 and 130. The amendments address transfers of business between connected companies, based on two issues identified by the industry.

Amendment 144 amends paragraph 154 of schedule 16, which addresses the way in which certain reliefs may be carried back to an earlier period so that the full benefit is obtained. Further consultation made it clear that the amendment is needed to ensure that the measure works in all circumstances.

Finally, amendment 145 amends paragraph 27 of schedule 17, which addresses the transition of life companies’ holdings of securities into the new regime. We have become aware that the rules would have permitted indexation allowance to create or enhance a capital loss when disposing of securities, which is not generally permitted under capital gains rules. The amendment ensures that excessive allowable losses do not arise.

Opposition amendments 195 and 196 would prevent the making of regulations under clauses 151 and 152 without prior consultation with interested parties. Unsurprisingly, given the nature of previous amendments tabled by the Opposition, the amendments also require the Chancellor to lay before the House a report on the impact of any such regulations—a recurring theme in this debate.

Clause 151 applies the rules on mutual life assurance companies to friendly societies and permits regulations to modify those rules, as necessary. Regulations have been made under a similar existing power. Clause 152 applies the rules on the transfer of long-term business between companies to friendly societies and also permits regulations to modify those rules, as necessary.

The Government stand firmly behind the idea of mutual co-operation and support on which friendly societies, and the mutual model generally, is founded. The Government are also committed to fostering diversity within the financial services industry, in which friendly societies play an important role. Moreover, the Government fully support the type of consultation and transparency for which amendments 195 and 196 call—I have already talked about the extent of the consultation we have undertaken to deliver the new regime—but the amendments are unnecessary. Regulations under clause 151 have been drafted, and we are already discussing those with the industry. That consultation and liaison will continue, allowing us to monitor the impact and operation of the regulations. Copies of the draft regulations have been provided to the Committee with the letter that my hon. Friend the Exchequer Secretary sent on 11 June.

The regulation-making power under clause 152 rewrites an existing power that has not been used. We have no current plans to make such regulations, and, of course, we would consult if any regulations were necessary.

Those simplifications should be seen alongside other tax changes we have made, or are making, that will benefit the life insurance industry. We are making major changes to the taxation of foreign profits, which will reduce compliance burdens, provide flexibility to UK headquartered groups and make solvency II-related, cross-border restructuring easier. Additionally, the industry will benefit from the branch exemption introduced last year and the reduction we are making to the corporation tax rate.

This package of tax reforms enjoys the broad support of the life insurance industry, providing the UK with a more effective, commercially orientated regime for the taxation of life companies, simplifying the tax code and making Britain an even more attractive place to do business. I commend the clauses, schedules and Government amendments to the Committee.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

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

I will speak to the provisions and Government amendments relating to clauses 55 to 149, and my hon. Friend the Member for Kilmarnock and Loudoun will deal with the remaining clauses in the group, which covers a large chunk of the Bill. As the Minister set out, the proposals are mainly non-contentious and are, for the most part, supported by the insurance industry. He explained well that the provisions represent the downstream consequence of the transposition into UK regulations of the European directive on insurance and life insurance capital adequacy, known as solvency II.

Although it is tempting to debate the wider merits and pitfalls of the solvency II regime—there are serious concerns about the impact of those changes on pensioners, on those paying premiums for their life insurance products, and on annuitants whom the changes may hit—it would not be appropriate to dwell excessively on those bigger questions at this juncture. We are debating today how Her Majesty’s Revenue and Customs calculates the taxes that our UK insurance companies ought to pay. As I understand it, and as the Minister has said, there are no substantive changes to the amount due from the sector. Insurance firms have not made any strenuous representations against the clauses and support parts of the changes.

In essence, our understanding is that the clauses preserve roughly the same quantum of tax revenue from the sector, but empower HMRC to use new means of calculating the sums due. The Financial Services Authority currently receives data about insurance and company transactions, and balance-sheet information, in a form that fits old regulatory requirements and the returns that were submitted, so that those can be properly monitored. Solvency II fundamentally restructures the nature of the regulation, and the restructuring of returns to the FSA as a consequence is provided for in the Bill.

Although the clauses are not contentious in nature, I have one or two queries that I hope the Minister will address. He has partly answered my first question, but will he clarify what total revenue changes are anticipated from the different divisions of the insurance sector as a result of the reforms? Although the overall impact may not affect the current projections, are there any particular sectors in the insurance industry that the changes may affect more or less than others?

The Minister referred to this point in his comments, but will he clarify what the anticipated costs are of implementing the administrative changes, both to HMRC and the insurance sector? The alterations are complex and bureaucratic, and presumably their implementation will carry a cost. Will the Minister clarify what the impact assessment says on that point?

What does the Minister predict will happen to insurance company profits over the medium term? Will they be adversely affected by the double-dip recession? Is there any HMRC internal analysis of how that tax base may vary in the years ahead, either because of solvency II or because of other pressures on the sector in general?

Chapter 5 sets out the rate of tax applicable to with-profits policyholders’ share of profits. What information will be sent to those with-profits policyholders on how their share will be taxed? Will it be left to customers to search that out for themselves, or will insurance companies be providing new information for them? I presume that no changes will be made to taxation at source—PAYE and so on—but will the Minister confirm that?

Will the Minister elaborate on clause 112 in chapter 6, in which there is a change to the indexation return on gilt-edged securities? Is this connected to the Government’s changes in indexation from the retail prices index to the consumer prices index, or are there other explanations? In chapter 8 there are provisions affecting overseas insurance firms that do business in the UK and across the EU. Are these changes likely to affect the competitive ability of firms, whether British or from abroad, to trade and do business in the UK?

Finally, in chapter 12 there is a set of powers to be granted to the Minister to make changes to the legislation through secondary legislation. Can the Minister assure the Committee that any statutory instruments that substantially change the terms of life assurance business will require an affirmative resolution and will need to be approved by a vote on the Floor of the House, rather than being dealt with by negative resolution?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to be back in Committee, and I am looking forward to our debates under your chairmanship, Mr Bone. I refer Members to my entries in the Register of Members’ Financial Interests in relation to the Co-operative and my membership of the Kilmarnock football club supporters’ trust.

I shall speak to amendment 195 to clause 151, and amendment 196 to clause 152. As Members will be aware, friendly societies and mutual insurers have been around for hundreds of years, and the early meetings of the friendly societies were often social gatherings at which people paid their subscriptions. We can therefore say that there is nothing new in the big society and people coming together to work for the benefit of themselves and their communities. Also, those of us in what is described as the Facebook generation may note that friendly societies were a very early form of social networking, with people coming together to share common interests. People joined friendly societies in large numbers, and over time the friendly societies and mutuals began to represent specific trades and professions. By the late 1800s, I understand that there were around 27,000 registered societies.

It is important to recognise that friendly societies and mutual insurers were often the only way working people could ensure that they had help in their old age, or in times of ill health. In those days, having no income often meant a life of begging or the poorhouse, and the importance of mutual societies to their members, given the tremendous social service that they provided, and that people provided for themselves and their communities, cannot be overstated. Of course, that is why successive Governments encouraged membership of those societies. Membership did drop off, perhaps as a result of the introduction of the welfare state, but even as recently as 1995 over half of the UK insurance industry was in mutual ownership.

I am one of those who regret the fact that a lot of time had to be spent defending the principles of mutuality and trying to ensure that people did not make a fast buck out of demutualisation—that is a debate for another day—but we have to recognise that large-scale demutualisation contributed to shrinkage of the sector. Today there are fewer than 300 friendly societies and mutual insurers, with a mutual share of around 5 per cent. of the UK insurance sector. Nevertheless, the ethos of those remaining societies remains consistent with their origins: the aim is to help people take better control of their finances within an organisation that is run for, and owned by, its members. We may not have the quantity of organisations now, but I would argue that we certainly still have the quality.

As we know, many mutual organisations are very proud of their heritage, and of providing members with the savings plans, mortgages and insurance that they need. Of course, the mutual sector nowadays is diverse. Arguably, organisations such as housing associations, various local community clubs, credit unions, employee-owned bodies and specialist organisations such as football supporters’ trusts and community mutuals are following that long heritage and tradition, and we are also seeing the development of new mutuals in the public sector—NHS foundation trusts, leisure trusts, co-operative schools and community housing—some of which have been controversial.

The important point—I shall explain later why I stress this—is that the mutual philosophy is built on a sense of ownership, and of members belonging to an organisation and trusting it to work in their best interests and for the interests of the wider community; it also allows participation in the democratic process.

As mutuals are of course owned by their members, they do not have obligations to external shareholders. They are free to focus entirely on their members’ needs and are a successful business model. As we have heard, there are mutuals within all sectors of financial services—banks, building societies, the friendly societies that these clauses refer to, insurers and health care providers. They can offer savings and investments—more recently they have been focusing on children’s savings—and mortgages, pensions and health care. It is estimated that the mutual sector in the UK accounts for over £95 billion in revenue, and affects in one way or another the life of one in three UK citizens. Around 20 million people in the UK are estimated to be members of at least one mutual, and over 900,000 people are working in the sector. Globally, mutuals’ aggregate turnover is equivalent to the world’s 10th biggest economy.

To come to the issue of the clauses and the part of the Bill that are before us, as we have heard from the Minister, friendly societies are treated for the purposes of corporation tax in the same way as life insurance companies, but with a number of modifications to reflect their special status—that is, they are not taxable on their trading result and some of their business is exempt. As we have heard, this treatment is reproduced in the new legislation by excluding them from the definition of an insurance company for the purposes of part 2 of the Finance Bill—the rules applicable to insurance companies. Part 3 re-extends the rules applicable to insurance companies to friendly societies within specific limits and with specific modifications.

Clause 151 provides that the long-term business of a friendly society will be taxed in the same way as that of a mutual insurance company, but with a subsection providing for exemptions, which are dealt with in clauses 153 to 169. There is also a subsection allowing for secondary legislation to provide exceptions to the mutual life insurance treatment and modifications. As we have heard, those measures reproduce existing legislation, under which regulations have been drawn up, as is permitted by the clauses, taking into account the fact that the regulatory terminology for friendly societies may well be different from that for life insurance companies.

In a number of cases, there are additional categories of business to which the investment returns must be apportioned, and regulations are required so that the appropriate tax rules can be applied to friendly societies. The Minister talked about the consultation on the regulations. Those regulations have to be recast entirely, because the primary legislation to which they point is, of course, different. There are a number of important issues to consider under those rules. I am pleased to see that the new legislation preserves the principle of mutuality in the same way as the current legislation does. However, some people might argue that there is nothing in the primary legislation to prevent secondary legislation from excluding certain categories of business that HMRC perceives as being not bona fide mutuals. It could be argued that this risk is already present under the current legislation. I think I heard the Minister give a commitment to the mutual sector, but it would perhaps be helpful for him to restate an assurance that if any risk to that principle appears, he will ensure that the secondary legislation deals with that, so that the principle of mutuality is not in any way undermined. I am sure that, in his discussions with the industry, that will be taken forward.

I understand that HMRC, in the context of the present reforms, is not envisaging any general policy changes towards friendly societies, which is helpful. As the Minister said, there is an improvement in the way the proposals in the Bill are being taken forward, in particular as regards simplification. Under the new legislation, all gross roll-up business, pension business, overseas life assurance business, life reinsurance business, individual savings accounts and child trust funds are to be taxed on the basis of their real trading profits, rather than, as the Minister said, under the I minus E system. Therefore a friendly society will no longer need to prepare trading computations for those businesses, as the profits will simply be ignored for corporation tax purposes, hopefully making life simpler.

The exemptions from corporation tax on income and gains attributable to certain classes of business are all preserved, particularly for unregistered friendly societies with income not exceeding £160 a year, in clause 171. Certain categories of long-term business, with current limits and conditions for exempt life assurance businesses, are dealt with in clauses 153 to 162. Part 2 also changes the way income gains and profits are apportioned between business categories as of 1 January 2013, and replaces the current rigid formulae with a new, more realistic commercial allocation method. That means that friendly societies, which also fall within the new rules by virtue of being treated in the same way as mutual insurance companies, will have to agree the new method with HMRC as early as possible. I understand—again, the Minister referred to this—that the industry does not feel that this will be a particular problem. Indeed, the changes are considered welcome improvements.

The transfer of business rules applicable to life assurance companies are to be applied to friendly societies. Again, this is broadly in line with the current rules and is particularly important for preserving continuity. There is a new targeted anti-avoidance rule applicable to life insurance business transfers where one of the main purposes of entering one-on-one arrangements is to secure a tax advantage. There is a clearance procedure to pre-empt its application. By virtue of clause 152, this will extend not only to transfers of engagement between friendly societies, and to transfers between insurance companies and friendly societies, but to amalgamations of friendly societies or their conversion into insurance companies. As I understand it, that is intended to be widely cast because of the tax planning opportunities represented by such projects.

Generally, we think that the primary legislation proposed would have its intended effect. Schedule 18, which makes a number of consequential amendments, carries through the new rules to the rest of the tax legislation. I understand that no questions have been raised by the industry on it. Schedule 19 provides for continuity between the current legislation and the new rules, and it looks as though that will work as intended. However, I want to mention a couple of areas where we have concerns, and which we want the Government to monitor. I heard what the Minister said about that, and why he believes our amendments are not necessary.

We tabled our amendments because there is some concern that the regulations relating to clauses 151 and 152 may have a retrospective effect. Given the potential vulnerabilities relating to mutuality and the transfer of business considerations, we simply want the Government to be required to consult with industry and to lay a review of the impact of any changes in the Library. I appreciate that there are further opportunities to modify the legislation to prevent any emerging unfairness via the regulations drawn up under clauses 151 and 152. I am sure that the Minister will give us an assurance that he will work carefully to deal with the differences in terminology relating to issues pertaining to friendly societies and to the wider mutual insurance sector. Although the general principles and most of the clauses we are considering are largely not contentious, past experience suggests that there tends be less scrutiny of the wording of secondary legislation, so there is perhaps all the more reason to consult on that and bring it forward, as the Minister has done.

The Minister referred to the fact that there is a theme running through our amendments. Hopefully the Government will appreciate that that theme is there because we believe in the importance of consultation and proper scrutiny. I will wait for the Minister’s response before deciding whether to press the amendments to a Division.

John Mann (Labour, Bassetlaw)

Having gone through the previous clauses almost litigiously, we now appear to be rushing at a huge rate, taking vast amounts of the Bill in one go, rather than giving it the line-by-line, word-by-word and comma-by-comma scrutiny that would be more appropriate to a legislature with 650 Members.

Peter Bone (Conservative, Wellingborough)

Order. The hon. Gentleman might not have been here at the beginning of the sitting, but that point has already been discussed.

John Mann (Labour, Bassetlaw)

Thank you for that information, Mr Bone.

On the question of unintended consequences, if we think back to the last Finance Bill, we may recall what happened when the draw-down pension issue failed to be identified. Some 300,000 pensioners across the country are now losing, in the case of my constituents, 60% of their pension, not because the Government wanted to victimise those hard-working, successful business people who had invested in private pensions, but because, somehow, changes sneaked into the Finance Bill had unintended consequences. Someone, doubtless a mandarin in the Treasury, got it wrong. One can forgive Ministers for not being on top of every minute detail. Looking at the level of detail in these clauses, one does not envy Ministers who are attempting to understand every jot and tittle.

Jacob Rees-Mogg (Conservative, North East Somerset)

Again, it is a pleasure to serve under your chairmanship, Mr Bone. I am extremely concerned that the hon. Member for Bassetlaw is undermining ministerial responsibility, which is a basic principle of our constitution. I have great confidence that the Ministers represented here know every detail and sentence of the Bill.

John Mann (Labour, Bassetlaw)

I would take the hon. Gentleman more seriously if he had not voted repeatedly to allow the European Union to impose its will on this Committee and this Parliament in setting British taxation levels, which is a choice that he and others have made during our proceedings.

Mutuals and friendly societies are, of course, the big society writ large. We have another name for them: trade unions. That is what the big society is all about, and it is a shame that, in the raft of legislation they have introduced, the Government have not learned from the mistake of the previous Labour Government, who failed to give those friendly societies known as trade unions proper authority on issues such as pensions.

An interesting observation on the financial crisis is that those European countries that allow the trade unions a proper stake in insurance and pensions, because of the tripartite arrangements that were started post-war, are those where the financial institutions have been more robust. Sweden, Norway and Denmark, as opposed to Iceland—the one member of the so-called Scandinavian bloc that went in a different direction after the war—have been more robust, as have the Netherlands and, ironically, small, little Belgium. That key factor warrants further examination.

The Government have not brought forward a whole raft of legislation to correct that anomaly in Britain’s financial sector, which is a shame because that would do much to underpin a vibrant, strong and consumer-trusted financial services sector in this country. That is not the question before us, however, so it is a matter for another day.

Looking at what is now emerging from the Budget, one finds that a toast tax and a storage tax were hidden away. Every day a new covert tax on the British people emerges that the Government have failed to outline. Are any such covert taxes that we need to know about hidden in these clauses? Will the provisions have any unintended consequences?

I appreciate, to return to my introductory remarks, that that creates a dilemma for the Minister, who is assiduous without question among all Government Ministers. Ministers have had to cover for the Chancellor repeatedly by doing U-turns on his behalf, and there is no question but that a job swap would be in the interests of the Government, the political party concerned, and the country. I recommend that instantly to the Minister’s Chief Whip, who is not here, and to those with such powers, but—

Peter Bone (Conservative, Wellingborough)

Order. Can the hon. Gentleman tell me what particular schedule or clause that relates to?

John Mann (Labour, Bassetlaw)

Clause 55, Mr Bone, and the consequential amendments. In all seriousness, I am developing an argument to support my point. What will the Minister do if, over the next year, unintended consequences emerge that he cannot outline, by definition, because amendments have not been made at the Committee stage? That is the point of comparison with draw-down pensions. The Government and Ministers appear paralysed when acting to correct an error, whether they are hiding behind their red boxes or behind good, earnest civil servants from Brussels. Ministers are hiding away when it comes to correcting a major, technical anomaly created by the previous Budget. They do not know what to do and are therefore not coming forward, even to instigate debate on what we, the legislators, might advise them to do to get out of the hole that they have created.

With this complex area, if unintended consequences emerge in the next 12 months, will the Minister tell the Committee the precise course of action that he will undertake, so that we can be reassured? If we collectively do not spot something in the provisions today, but a problem emerges later because of the technical complexity, we need a guarantee that the Minister will bring the matter to the House instantly to give us the opportunity to correct any errors.

Mark Hoban (Conservative, Fareham)

Let me first correct an error made by the hon. Gentleman, who presented a rosy view of countries where there has been strong trade union representation and a tripartite system of pensions. I remind him, however, that not only was Belgium without a Government for 535 days, but in Denmark, we have repeatedly seen bank failures, and cross-border bank failures have happened in Belgium and the Netherlands. Perhaps the hon. Gentleman was late because he was studying those matters in more detail, and if so, I recommend that he is late for this afternoon’s sitting too, so that he can pay a bit more attention to what has happened in such havens of trade union-engendered stability. As you might ask me what clause that relates to, Mr Bone, the answer is none of them, so I will deal with the questions raised so far in the debate.

The hon. Member for Newcastle upon Tyne North asked whether any particular parts of the industry would not be affected. We do not calculate the tax impact in that level of detail, but we have sought to consult fully with the industry to ensure that we get the rules right. There was the process of consultation that I set out, and we have tabled amendments to the Bill at this stage in order to deal with some unintended consequences, so when such problems are found, we listen, as the hon. Member for Bassetlaw will be pleased to know, and we try to get them right.

The hon. Lady also asked about the Bill’s impact, in terms of burdens on businesses. Although there will be some one-off familiarisation and training costs for tax specialists, the measure simplifies the tax regime. Bringing the tax computations more closely into line with accounting procedures, rather than regulatory returns, will help to bring benefits to businesses in the long term. Bringing the tax computations more closely into line with accounting procedures, rather than regulatory returns, will help bring benefits to businesses in the long term.

The hon. Lady asked whether I could forecast the medium-term profits of life-assurance companies. I assure her that if I were able to do so accurately, my talents would be used down the river and not in this Committee Room. The profitability of those companies depends on returns on investments and, of course, the best help that we can give is to tackle the legacy we were left by the previous Government and create a more stable economy. I am sure she will welcome the fact that the consumer prices index fell today.

The hon. Lady asked whether these changes will make UK industry less competitive. I do not believe that these changes will damage the competitiveness of the UK insurance sector compared to foreign companies; that is why we have engaged closely with the industry in the design of this and will maintain close links with the industry and discuss the implementation and operation of the new regime regularly. Of course, industry is not slow to tell us when things are not going quite according to plan.

The hon. Lady asked whether it would require new information for policyholders. No new information is required for policyholders and there is no reason why it should have an impact on PAYE, upon which she sought clarification. The changes she referred to in the indexation of gilts had nothing to do with the RPI/CPI change. The hon. Lady asked about the process for parliamentary scrutiny of regulations. We are following the precedent set in previous legislation and the statutory instruments are by the negative procedure, but, of course, she and others are welcome to pray against those if she feels there is need for a debate on those statutory instruments. I look forward to that.

I can assure the hon. Member for Kilmarnock and Loudoun that Kilmarnock FC does not fall within the legislation, unless it happens to be a friendly society selling insurance products—I suspect not. The Government stand very firmly behind the ideals of mutual co-operation and support on which the friendly society movement and the mutual model generally are founded. All life companies and friendly societies have to be brought within the new rules, because the existing regime will no longer work for them under solvency II, but we have been very clear that we are not making any changes to the fundamental principles on which mutual insurers are based. We have made specific consultation arrangements for the mutual and friendly society sector in order to ensure that any particular concerns are fully considered, which is why I do not think that the hon. Lady’s amendments are necessary. The fact that we are consulting with the sector at the moment demonstrates that they are unnecessary.

The hon. Lady asked whether the changes were necessary for friendly societies and whether they would have a disproportionate impact. If we were to maintain the existing regime for friendly societies, an additional set of computations would be required. Societies would need accounts under the solvency II regime and the existing regime. I do not think that that is efficient. We are able, as a consequence of this move, to cut the number of pages of regulations for existing friendly societies from 38 to 7; that is of use to them and I hope it is welcomed by them. The hon. Lady should be reassured, as the sector should be, that we will always consult on that. She raised the issue of the retrospective impact of the proposed instruments. Again, we are talking to the sector about those and should be able to clarify any concerns the sector has.

The hon. Member for Bassetlaw touched on pensions. There is some press coverage to suggest that some of the taxation issues related to solvency II will have an impact on pensions; that is not the case. With that, I hope that the Committee will see this large and capacious group of new clauses pass into legislation.

Clause 126 - Restrictions in respect of non-trading deficit

Clause 129 - Intra-group transfers and demutualisation

Clause 130 - Transfers between non-group companies: present value of in-force business

Schedule 16 - Part 2: minor and consequential amendments

Schedule 17 - Part 2: transitional provision

Clause 180 - Controlled foreign companies and foreign permanent establishments

Stephen Williams (Liberal Democrat, Bristol West)

I beg to move amendment 2, in clause 180, page 105, line 19, at end add—

‘(2) Notwithstanding the provisions of Part 4 of Schedule 20, the Schedule will not come into force until a full impact assessment has been prepared in conjunction with the Department for International Development reviewing the effect on developing countries’ tax revenue, and details of aid and technical assistance being provided to developing countries in order to increase the capability and technical expertise in their tax regimes to collect the taxes that are due in their countries, has been laid before and approved by the House of Commons.’.

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Clause stand part.

Government amendments 46 to 51, 146, 52 to 56, 147, 57 to 59, 187, 60 to 110, 188 and 189 and 111 to 113.

Amendment 3, in schedule 20, page 520, line 31, at end insert—

‘42A Notwithstanding the provisions of this Part, this Schedule will not come into force until a full impact assessment has been prepared in conjunction with the Department for International Development reviewing the effect on developing countries’ tax revenue, and details of aid and technical assistance being provided to developing countries in order to increase the capability and technical expertise in their tax regimes to collect the taxes that are due in their countries, has been laid before and approved by the House of Commons.’.

Government amendment 114.

Amendment 190, in schedule 20, page 522, line 2, at end insert—

‘(3) HM Treasury and HM Revenue and Customs shall publish an assessment of the implementation and impact of the changes made in this schedule each year from commencement for the first three years of operation, including—

(a) the impact of the changes on developing countries and whether any further aid or technical assistance needs to be provided to those countries to safeguard their tax revenues;

(b) the cost of the changes to the Exchequer and whether they are consistent with HM Treasury forecasts;

(c) whether the rules operate as expected and provide certainty to companies.’.

Government amendments 115 to 117.

That schedule 20 be the Twentieth schedule to the Bill.

Stephen Williams (Liberal Democrat, Bristol West)

It is a good job that I was not late to the Committee this morning otherwise I may not have realised that we were getting to this clause with such haste. Our movements so far have been at a glacial pace, and I thought that it would safely be Thursday or even next week before we reached amendment 2, which I tabled many, many weeks ago and the briefing of which I read many, many weeks ago. This is a confessional moment; I have not picked up my red box, which is located behind your dais, Mr Bone, and the briefing and notes on amendment 2 are lurking within that box. With the indulgence of the Committee, I hope that you will bear with me as I talk briefly to the amendment, while trying not to turn too red in the process. Inspiration on the Front Bench may well be forthcoming, but I will try to do without it and read the amendment—if I can find it in that red box while my hon. Friend helps me out—but it might be a bit difficult.

The purpose behind this amendment was to strive for joined-up government, in particular between Her Majesty’s Treasury and the Department for International Development. We all know that it was a goal of all three principal parties at the last general election to ramp up the proportion of overseas aid that our country spent as a proportion of GDP to 0.7% by a target date of roughly 2013, though there was some variation in this. This coalition Government have committed to doing that, and we will be the first major economy in the world to get to that goal of 0.7% of GDP.

That investment will be made in developing countries around the world and we want to make sure that the investment on behalf of British taxpayers is well made. The reason why I am discussing this in a Finance Bill is that some of the decisions that we make in this Bill have repercussions beyond our own shores. Clause 180 is about controlled foreign companies, which is something I used to work on in my previous career many moons ago, before I became a Member of Parliament. The regime changes that are proposed by clause 180 and schedule 20 will have an effect on the ability of overseas Governments to collect their own taxes. The purpose of this amendment is to encourage strongly the Treasury and the Department for International Development to co-operate on a cross-Government basis to build the tax gathering capacity of overseas Governments to collect their own taxes.

The primary purpose of Members of Parliament and of this Committee is to be guardians of our own public expenditure. I am sure that my hon. Friend sitting next to me would say that it is possibly the primary duty of all Members of Parliament and the House of Commons to safeguard the public purse, make sure that money is well spent and protect our tax base. So I understand why the Treasury is putting forward the amendments to the existing controlled foreign companies regime, in order to protect the UK tax base and to increase it by bringing back to the UK companies that have perhaps chosen to structure their activities in other regimes. What I am trying to draw attention to, without the inspiration that appears not to be in my box after all—it is probably in another folder in my office—is a briefing from the coalition of charities. I should mention ActionAid and Christian Aid, which are charities that I am sure that all members of the Committee would support. They are part of the inspiration for this amendment and were going to brief some members of this Committee tomorrow, though that briefing will no longer be necessary. I give way.

John Mann (Labour, Bassetlaw)

I am glad to hear that he is so inspired. Since the coalition Government came in, a new country has been created in South Sudan, which by definition therefore cannot have had any tax infrastructure. How precisely and within what time scales would this amendment impact on British assistance to South Sudan in terms of their taxation system?

Stephen Williams (Liberal Democrat, Bristol West)

I thank the hon. Gentleman for his intervention. Clearly I cannot answer in great detail. I am not an expert on the situation in South Sudan, but it is a good question as to how a new state starting from scratch will need to build up its governance in all areas, whether in the military, the treasury or its tax-gathering capacity.

John Mann (Labour, Bassetlaw)

. I clearly was not explicit enough in my question and the hon. Gentleman may not have fully understood. How precisely would this amendment, if passed, assist that process?

Stephen Williams (Liberal Democrat, Bristol West)

If this amendment were passed, it would require the UK Government, both through the expertise available within HMRC and through the development aid assistance that comes from the Department for International Development, to publish how they will work to increase on the ground the professional capacity of overseas states to collect the taxes that are properly due under their national laws.

The reason why I mentioned joined-up government in the context of an enormous increase in the Department for International Development’s budget is that, given the budget pressures elsewhere, it would be perverse to increase the largesse that British taxpayers spread across the world while the foreign Governments who receive that increased assistance are unable efficiently to collect the tax revenues that they are due. That is the amendment’s central purpose.

Sheila Gilmore (Labour, Edinburgh East)

The hon. Gentleman gave what he thinks might be the view of the hon. Member for North East Somerset, but is it not the case that, from a British point of view, if developing countries lose a lot of tax income, that has a direct impact on us, not least through the aid budget?

Stephen Williams (Liberal Democrat, Bristol West)

Exactly. The hon. Lady reinforces my point. I am sure we are all in favour of joined-up government. We know that the Department for International Development will be spending more money, whether in South Sudan or in other parts of Africa and Asia, on education programmes, maternity programmes and all the other aid programmes on which we would want to spend that budget.

Of course, we want all those countries to be in a position to grow their own economy and to collect their own taxes so that they can stand on their own two feet and fund Government programmes to further the development of their population, to increase confidence that they can be well run and democratised, and to allow people to make the rational choices, or perhaps the irrational choices, that we make every five years in our own elections, which are conducted on issues of tax and spend. At the moment, many of those countries are in a relationship where much of what their Governments do is essentially done because foreign Governments, such as ours, or international agencies, such as the United Nations or the European Union aid programme, make those basic services possible.

I am sure we would all want to reach a position where overseas countries are able to fund their own programmes, but Governments cannot fund programmes if they cannot collect efficiently the taxes that they have decided are due from businesses that operate in their country, whether those businesses are in the extractive industries or in more advanced secondary industries.

I look forward to the inspired response of my coalition colleagues on the Treasury Bench, particularly on how the Treasury, with the professional expertise of HMRC available to it, will advise overseas Governments on the possible impact of the amendment and the clause.

Nigel Mills (Conservative, Amber Valley)

Does my hon. Friend agree that schedule 20 would be a terrible way for developing countries to run their own tax regimes, with 97 pages of extremely dense and complex legislation that even experts cannot follow and that has taken years to produce? A simpler and more understandable tax system might be better.

Stephen Williams (Liberal Democrat, Bristol West)

My hon. Friend makes an excellent point, with which I am sure we would all concur. Britain has given many things to the world, including to parts of the country that we used to run, such as the rule of law and parliamentary democracy. Indeed, we have even given many parts of the world better electoral systems than we have in this country. One thing I hope we do not give to the rest of the world is the capacity for legalese, very fat Finance Bills and ponderous legislation that we all have to endure as Members of the House of Commons. I look forward to hearing from my colleagues on the Front Bench how the Treasury will be able to work alongside DFID to advise foreign Governments on the repercussions of the clause and, more generally, to consider how we can increase the tax-gathering capacity of overseas Governments so that they can raise their own resources and will not in future be so dependent on allocation of resources from other states.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to serve under your chairmanship, Mr Bone. I note that amendment 2 is grouped with the clause stand part debate and the various other amendments relating to it. I will seek to address all the points relating to clause 180 and schedule 20 as well as the relevant amendments.

Clause 180 introduces new controlled foreign companies rules, which are a key part of our corporate tax reforms. Together with the reduction in the rate of corporation tax to 22% in 2014 and the introduction of the patent box, these reforms are another step towards our aim of creating the most competitive corporate tax system in the G20, a tax system that will provide the right conditions for business investment and growth in the UK. The CFC rules are designed to protect the UK tax base from artificial diversion of profits. The reforms will ensure that this is done in a way that reflects modern, global business practices, significantly reducing the compliance burdens of business.

Reform of the UK’s controlled foreign companies rules is frequently identified by multinationals as the key priority needed to improve the UK’s tax competitiveness and to ensure it remains an attractive place to do business. The UK needs CFC rules to protect against artificial diversion of UK profits to low-tax jurisdictions. The CFC rules were introduced in 1984 and we have accepted that in an increasingly global economy, it was time to reform and modernise these rules. Business also believes that reform is needed, a view so strongly held that some businesses were starting to leave the UK.

In November 2010 we published the corporate tax road map, which set out our plans to give businesses a competitive and stable tax system that provides the right conditions for investment in the UK. Since then we have cut the main rate of corporation tax, most recently to 24%, and this will continue to fall to 22% by 2014. Last year we introduced an opt-in exemption for foreign branches of UK companies and made interim improvements to the CFC rules.

John Mann (Labour, Bassetlaw)

Will this have a direct impact on the British football industry? One does not even know who owns certain football clubs at the moment. Is there anything in the provisions that will improve the tax take and therefore, indirectly, the transparency of the British football industry?

David Gauke (Conservative, South West Hertfordshire)

No. There has been considerable consultation on this matter. We have received representations from a number of sectors, but I am not aware of any representations from the football industry. Perhaps if I can develop my remarks and set out the role of CFCs, it may help the hon. Gentleman and the Committee more generally. I think he will see that CFCs are not likely to be relevant to the ownership of football clubs. This is with regard to multinationals with entities that are based outside the UK.

In this Finance Bill, alongside the reforms to the CFC rules, we are also introducing a patent box to encourage innovative activity in the UK. Following extensive consultation, we have developed detailed proposals that meet our policy aims, and we are now putting them into statute. Since we embarked on CFC reform, the flow of businesses leaving the UK has been stemmed. Indeed, recently we have seen businesses wanting to return to the United Kingdom, or coming here for the first time.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister said that the flow of businesses out of the UK had been stemmed. Can he clarify what that flow has been?

David Gauke (Conservative, South West Hertfordshire)

The hon. Lady will be aware of a number of entities that left around 2007-08. Indeed, those of us who have been debating these matters for some time will remember the debate we had at that time, as a number of companies left the UK. The entities that are returning include WPP, which recently announced that it was looking to return to the United Kingdom. I am delighted to say that Rowan and Lancashire have already come here. Once the rules are in place in 2013, we anticipate that more businesses will follow.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister refers to “a number” of companies. Will he specify what that number is? Were the businesses that have agreed to locate in the UK the same ones that moved out of the UK?

David Gauke (Conservative, South West Hertfordshire)

The likes of WPP, Shire and UBM have re-domiciled out of the United Kingdom, and there is significant interest in their return. It is clearly in the interest of the UK economy to have head offices located here. It is helpful to have decision makers based here. If head offices are already based here, the UK becomes a more attractive location for others. The cluster effect caused by having expertise in the UK will have beneficial knock-on effects. Clearly, it was damaging for the UK economy when companies such as WPP, UBM, Shire, Rowan and Lancashire moved away. I am sure that both sides of the Committee welcome the return of such companies. I will say a little more about that in a moment.

I return to amendments 2 and 3, which have been tabled by my hon. Friend the Member for Bristol West. He made a remarkably fluent speech in the circumstances. [Interruption.] I will try to resist responding to that suggestion by my hon. Friend the Member for Poole that it might have been better than the speech that was prepared. None the less, I think that my hon. Friend the Member for Bristol West set out well the case for the amendments, which ask the Government to prepare an impact assessment on the effects of clause 180 and schedule 20 on developing countries’ tax revenues. Amendment 190, which we have not yet debated, also asks for such an assessment to be made each year from the commencement of the rules and for the first three years of their operation.

However, as I explained recently to the International Development Committee, it is not feasible to produce the assessments proposed by either of the amendments. Any assessment of the impact of CFC reform on developing countries would need to focus on, and would require, a full understanding of the interaction between multinational companies and the tax regimes in the developing countries in which they are located. It would be an assessment, not of our tax rules but of the tax rules of a range of other countries.

While this Government do not think that any such assessment would be feasible, they are committed to ensuring that developing countries have the assistance they need to make sure that their own rules reduce tax avoidance and protect their tax base. Our corporate tax system is not the best way to help those countries. It is designed to protect the UK’s tax base, not those of other countries. The key issue is ensuring that developing countries have effective systems that build and protect their own tax base and to ensure that they can access and act on tax information. These amendments also ask for details of aid and technical assistance being provided to developing countries to improve their tax regime.

Grahame Morris (Labour, Easington)

Could the Minister clarify that? If there is a UK-based company with one subsidiary in a tax haven and another in a developing country, presumably at the moment that developing country would be protected from loss of tax revenues if that company relocated the business in a tax haven. That is because the UK tax law would be caught in our net, but with these changes, presumably that protection will no longer be afforded. The hon. Member is shaking his head, but this is what the NGOs ActionAid and Christian Aid are saying. I would be interested in the Minister’s view of whether that is a correct assessment.

David Gauke (Conservative, South West Hertfordshire)

I understand the point that the hon. Gentleman makes. We do not believe that the estimates produced by some of the NGOs in this area are accurate. If he would like, I will spend a moment or so saying why those assessments are not accurate. For example, ActionAid estimates a £4 billion impact on developing countries. It is worth pointing out how that calculation was reached. It was based on financial data from only 10 UK multinational companies. ActionAid assumed that companies were liable to pay the headline rate of tax in that country and concluded that a fifth of the tax base of developing countries would be lost. We do not see the evidence for that. The difficulty with this assessment is that it seems to take no account of the fact that many developing countries offer tax holidays or incentives to foreign businesses to encourage them to operate there. A common feature of developing countries’ tax systems is reducing the corporate tax liabilities that are due. This means that there is often little incentive for companies to shift profits from developing countries to low-tax jurisdictions. I will give some examples of that, provided by PricewaterhouseCooper’s assessment of international tax jurisdictions in its worldwide tax summaries. For example, headline rates are broadly 30% in Kenya, Rwanda and Tanzania, but those three countries provide for an effective 0% tax rate for companies investing in designated zones, subject to some conditions.

This is provided either in the form of a tax holiday or a 0% rate for 10 years, or indefinitely in the case of Rwanda. Kenya provides investment deductions of 150% for qualifying investments above a certain amount incurred outside Nairobi or the municipalities of Mombasa or Kisumu. Rwanda also grants tax incentives in the form of profit tax discounts. Broadly, these are based on the number of Rwandans employed. The rate of profit tax discount ranges between 2% for employing between 100 and 200 Rwandans to 7% where a company employs more than 900 Rwandans. The reason why I have digressed into that area is that none of that is taken into account in the ActionAid assessments. It assumes that the headline rate applies, and that is how it reaches its assumptions.

Ian Mearns (Labour, Gateshead)

The Minister mentions the ActionAid assessment. I read the ActionAid briefing on this issue with some interest. I am surprised that British companies, in which there are significant Government interests, have many hundreds of subsidiary companies in tax havens, including some of the large banks in which the Government hold a significant financial interest. RBS and Lloyds, for example, have many hundreds of subsidiary companies registered in tax havens. The vast majority of the electorate will be surprised, too. The Minister needs to think about how we are going to tackle this problem.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman makes two separate points. First, in respect of those companies with subsidiaries around the world in low-tax jurisdictions or, in some cases, tax havens, there are issues about our ensuring that we properly collect the tax that should be paid in the UK. The focus of the clause ensures that tax relating to profits made in the UK should be collected here, in a move towards a territorial system. We are determined to do that.

Secondly, the UK can play the most effective role in developing countries by not using our corporate tax system in trying to be the world’s policeman. The CFC rules should, rightly, be focused on how we protect our tax base. If there is some benefit in the old CFC rules for developing countries, that is incidental and not what they were designed to do. We can and do help developing countries build up their capacity. In a moment, I will say a little bit about what we are doing in that regard.

Several hon. Members rose—

David Gauke (Conservative, South West Hertfordshire)

I give way to the hon. Member for Edinburgh East.

Sheila Gilmore (Labour, Edinburgh East)

Having started by saying that it would not be possible or feasible to carry out an assessment of the impact of the measure, the Minister gave a considerable amount of information about how he thought that tax regimes would work. Is it so difficult to make that assessment? Given the information that countries have lower rates than we think, those regimes would not be that effective. Presumably, the information is there.

David Gauke (Conservative, South West Hertfordshire)

I was quoting the PWC worldwide summaries to demonstrate how complex the matter is. I set out in a brief summary some of the complexities in the Kenyan and Rwandan tax systems. Were we to attempt to make an assessment in the way requested in the amendments— I appreciate the good intent of the Committee members who tabled them—the challenge would be that, although HMRC or the Treasury might be capable of assessing how the UK tax system works, they do not have the information to get to grips with the complexity in other tax jurisdictions.

Robert Syms (Conservative, Poole)

The Minister is explaining a remarkably complex, difficult area. Nevertheless, the hon. Member for Bristol West made some good points at the beginning, even without his notes. Might it be more beneficial to meet the Minister at some point, with representatives of the charities, to take this matter a little bit further? That might help. I do not think that we will decide much today about this complex area.

David Gauke (Conservative, South West Hertfordshire)

I reassure my hon. Friend that I have had meetings with ActionAid and Christian Aid on that subject, and the fact remains—there is no getting away from this—that the UK Government are not in a position to make an accurate assessment of the impact that changes to CFC rules will have on developing countries. Where such analysis has been done, it has been somewhat simplistic and with flaws in the methodology. We as a country can build up capacity in developing countries and make an effective contribution, and I will say a word about how we can do that in a moment.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

In many ways, the point that I wished to make has been superseded by comments from my hon. Friends. It appears, however, that the Minister is making a powerful argument for amendment 190, which seeks to monitor the effect of these changes on an ongoing basis. Will the Minister clarify why he believes that it is not possible or appropriate—I am slightly unclear as to which the Minister means—for Her Majesty’s Revenue and Customs and the Treasury to make an assessment at this stage of the impact that the changes will have on developing countries? We are talking in terms of such things being outside our jurisdiction, yet under the current regime and CFC rules, the tax affairs of companies in foreign jurisdictions that are controlled in the UK come within the interest and information collection remit of HMRC. I therefore wish to understand why at this juncture the Minister does not believe the measure appropriate or possible, and which of those he means.

David Gauke (Conservative, South West Hertfordshire)

First, our tax system is complex as it is, so let us not attach additional complexity. Its purpose is to collect tax that is due in the UK, and the focus pursued by this Government—which the preceding Government had already begun to look at—is on territoriality and the tax that relates to profits made in the UK. Our tax system is there to do that, not to be a world policeman.

Secondly, as far as analysis is concerned, let me again make the point that the impact of CFC reforms on developing countries will depend on the tax systems in those countries. HMRC and the Treasury do not necessarily have all the data and expertise to make an assessment for those countries, and that will depend on the policies of those countries which, as I demonstrated with the examples of Kenya and Rwanda, can change. Those countries put in place tax regimes to attract investment and be competitive, and that has a major impact on the implications of any policy in that complex area.

The information that I have provided on Rwanda and Kenya comes not from internally-sourced HMRC information but from work done by PWC. I understand why the amendments have been tabled and the good intent, but they ask for something that HMRC and the Treasury are not in a position to do with any great robustness. Robust analysis is not possible in that area.

Nigel Mills (Conservative, Amber Valley)

Does the Minister agree that in trying to support developing countries to get their tax policy right, we should not accidentally clobber them with two things? First, if they give a tax holiday or tax waiver to a company to help it to invest in their country, a rich country such as ours should not then tax that profit through an anti-avoidance regime, so that all the incentive does is move tax from the developing country to the richer one.

Secondly, what often happens is that a company wants to set up a hub in a certain area, employ people, and make things there to service a market of neighbouring countries. We do not want the rules accidentally to stop that, so that we end up trying to tax that company because it is trading with five of its neighbours, instead of only in one territory. Rather than deal with the concerns that the amendment addresses, we need to get some other issues right, so that we do not stop such countries trying to attract the investment that they want.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend is absolutely right that we do not want to prevent investment in developing countries, and I do not believe that anything in the clause and schedule would do so.

Grahame Morris (Labour, Easington)

I do not want to labour the point that the hon. Member for Amber Valley has touched on, but there was the suggestion that—the Minister gave the examples of Kenya and Rwanda—countries are doing something unusual to attract business investment by offering incentives, or tax disregards. Is that not what we do in the United Kingdom with enterprise zones? We forgo potential tax revenue in order to achieve economic activity, unfortunately not in County Durham, but in Oxfordshire or wherever the enterprise zones are declared. Is that not an established principle in the short term in order to generate activity for those developing counties? We surely should not be denigrating that.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman is absolutely right, and I was in no way criticising Kenya or Rwanda. My point was that some assessments in this area have assumed that headline rates will always be what is paid, and do not take into account that developing countries will often have tax incentives to encourage investment. I am not critical of that in any way; it is very much a decision for the relevant developing countries. They recognise the need to be competitive in tax terms. All I am saying is that some analysis in this area has been somewhat simplistic, and has assumed that it is always the case that the headline rate applies for every pound of profit made, but that does not accurately reflect what happens in developing countries.

It would be relevant to the debate to explain a little about the support that the UK provides through the Department for International Development and HMRC to provide robust, fair and sustainable domestic taxation systems in developing countries. Our priorities for achieving that are capacity building, improving the exchange of tax information, and increasing transparency in the extractives sector to address corruption.

T o outline some specific examples for the Committee of our work in that area, in Burundi, through DFID support from January to June 2011, revenue collection was 37.4% above the level for the same period in the previous year. Through the twinning of HMRC and the Ethiopian Revenues and Customs Authority, the UK has helped the accountability, political neutrality and transparency of revenue collection in Ethiopia. From 2002 to 2011, tax collected in Ethiopia increased by 700% in absolute terms. We also support the African Tax Administration Forum by providing technical support; for example, we send tax experts to train staff on the ground, particularly in the area of transfer pricing.

Earlier this year, HMRC hosted senior officials from the Uganda Revenue Authority in order to share knowledge and experience of risk and intelligence techniques. HMRC has delivered technical assistance in Rwanda, covering the taxation of banks, construction and telecommunication companies. Through DFID, we have also provided funding to help Kenya and Ghana exchange tax information with other countries in line with global standards. The Government are supporting efforts to promote transparency and accountability in the extractives sector, and we are currently working through EU proposals on the transparency of payments made to foreign Governments by the extractives industry.

Such projects play a vital role in helping the Governments of developing countries to put effective tax policies in place and collect the tax they are owed, and I can put that in the context of the considerable efforts that we have made on overseas aid. Last year we spent 0.56% of our gross national income on overseas aid, and we are committed to spending 0.7% of GNI on overseas aid from next year.

Amendment 190 asks that the cost of changes to the controlled foreign companies rules be assessed to determine whether they are consistent with Treasury forecasts. The Exchequer impacts of the changes to the CFC rules are set out in tables 2.1 and 2.2 of Budget 2012, and the total cost of the changes is detailed in the Budget 2012 policy costings document. The total cost of reform is £910 million in 2018-19. As part of the Government’s approach to better tax policy making, we are committed to improving transparency. The tax information and impact note or TIIN published in December 2011 and updated at Budget 2012 sets out the impacts of CFC reform. This measure will be monitored and assessed alongside other measures included in the Government’s package of corporate tax reforms. However, the immediate impact of the reforms is clear from the reactions of business to the introduction of the regime. The changes have been widely welcomed, and have not only succeeded in halting the flow of companies from the UK, but have begun to reverse that direction of travel.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister has said that the impact of the changes is immediately obvious from the reaction from business, but does he accept that other behavioural changes that may result from the measures in the short, medium and long term, in terms of organisations restructuring to take further advantage of the rules, could impact on the numbers?

David Gauke (Conservative, South West Hertfordshire)

Of course we have made various assumptions and assessments of the behavioural impacts of CFC reform, just as there are assumptions regarding the behavioural impacts of every tax measure. We believe that reform of CFCs is a very important part of tax reform to make the UK more competitive. As a consequence of CFC reform, we anticipate that more companies will be headquartered in the United Kingdom. Businesses will domicile here, and that is an asset to the UK economy. It is a very clear signal that Britain is open for business, which is something that I am sure Members on both sides of the Committee will welcome.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As I understand it, the Minister is saying that the positive figures in the Red Book, and the positive net effect of the changes, will mean increased revenue to the Exchequer as a result of companies relocating to the UK. Is that a correct understanding? It seems that the Minister is suggesting that by 2016-17 there will be a positive net effect of £35 million for the Treasury, as opposed to a reduction of £805 million. Those figures do not seem to add up to a significant net positive effect for the UK.

David Gauke (Conservative, South West Hertfordshire)

As far as the numbers and the costings are concerned, the changes in the various numbers we have seen from one iteration to another between December 2011 and March 2012 are to do with changes in the modelling and further evidence coming forward, as opposed to one number being a static cost and another taking into account the relocation of companies, if that is what the hon. Lady is suggesting. There is a cost within the scorecard, as I have made clear, because of the changes to the CFC regime, but we think that that is a cost that is justified by the increased competitiveness of the UK as a location in which to do business that is brought about by these changes.

There has been cross-party consensus on the need to address CFC reform. The previous Government commenced the process, and we on the Government Benches may be somewhat critical of the progress that they made, but we welcomed their desire—at least in their last year or two in office—to have a more effective and competitive CFC regime.

Sheila Gilmore (Labour, Edinburgh East)

Will the Minister explain in more detail where the advantages are coming from? There is clearly a loss of tax, and the amount of tax that would be gained from such companies relocating would appear to be relatively small compared with that loss. Is the Minister’s primary argument that there will be other advantages? Can he quantify those advantages?

David Gauke (Conservative, South West Hertfordshire)

More businesses will be domiciling in the UK as opposed to moving out, which is what they were doing in 2007-08. Those of us who were talking to tax professionals on a regular basis in those years heard horror stories about how many companies were considering relocating and how many multinationals were looking to move their offices out. That tide is now being stemmed and reversed. It must be good for the United Kingdom to have head offices located here and to have, for example, the likes of Aon, a US insurer, choose to locate its head office in the United Kingdom. The fact that senior staff are moved here and that decisions are made from here is beneficial to the reputation of the UK as a place to do business. There are benefits to having professional services firms locate here. The fact that the UK is seen as being the centre for businesses is one that I hope we would all welcome.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Will the Minister give way?

David Gauke (Conservative, South West Hertfordshire)

I am keen to make progress, but I will give way.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the Minister for giving way again. He is simply responding in advance to some of the queries that I will raise when I speak to amendment 190, if you will allow me to do so, Mr Bone. The Minister talks about the benefit to the UK of such companies relocating their headquarters to the UK, but he still completely fails to provide any indication of the actual economic benefit. Obviously, the concept is good, but in the current economic climate, in which tax losses are estimated at £910 million—that could be conservative—and given that the potential impact on developing countries is as yet unquantified, it is important that the Government are able to set out an economic argument for the proposal.

David Gauke (Conservative, South West Hertfordshire)

As far as the costings are concerned, these are our central assessments, which have been signed off by the Office for Budget Responsibility. I have certainly received plenty of representations saying that the reforms will not cost as much as we anticipate, because the dynamic effect will be that much greater, and that more businesses and individuals, paying a lot in tax, will relocate here. That is our assessment, and it is a fair and reasonable one. The measures add to our competitiveness, in the same way that corporation tax rate cuts add to our competitiveness. They make the UK a place to which businesses from around the world want to relocate— I will say a little more about the emerging evidence for that—and they send a clear signal that Britain is open for business, which we should welcome.

John Mann (Labour, Bassetlaw)

I know that intellectual property rights are incorporated into schedule 20; are image rights incorporated, and if not, why not?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman is right to say that intellectual property rights are an important part of the CFC regime. I am not sure whether he is seeking to return to the issue of football clubs, because that is one area where image rights tend to play an important part. Perhaps I should say a word or so to confirm my earlier point that CFC rules apply to UK resident companies that have foreign subsidiaries. Football clubs do not tend to have those, so it is not clear whether the CFC legislation would have any particular impact on them, and there is no consultation response to suggest that it would.

Image rights as part of intellectual property rights more generally are included, but if the hon. Member for Bassetlaw is going to argue—it is not always easy to anticipate his arguments—that football clubs may establish foreign subsidiaries, that the image rights would be held in them, and that this would provide a tax break for them, I have to say that that is unlikely. Any artificial diversion of profits from outside the UK to elsewhere would be addressed in the anti-avoidance regime that applies to CFCs. I hope that I have not only answered his question but anticipated his next questions.

As I have said, the Government are committed to making better tax policy. In March 2011, we published our tax consultation framework, which recognises the importance of fully engaging with those who will have to operate the rules in the development of tax policy. Such engagement allows the Government to explore, develop and test new ideas to improve the tax system and to ensure that change is well targeted, that its likely impacts are understood, and that the legislation is fit for purpose.

Our consultative approach is the way to ensure that we get difficult reforms right and that the rules operate as expected. The new CFC legislation has benefited from extensive consultation with all interested parties from November 2010 through to the publication of the Finance Bill in March 2012. The consultation process has been open. We have published clear policy objectives, options and decisions on detailed policy design followed by draft legislation. The Government have supplemented that through discussions with a variety of working groups to understand better the impact of policy decisions on the businesses that will be affected.

Following publication of the Finance Bill in March, we have listened to further representations from business and advisers, and carried out further work. As a consequence, we are making a number of amendments to the legislation that will reduce uncertainty for businesses and HMRC in applying the rules. I shall provide more information on those later.

To ensure that those operating the rules have certainty about how they apply, we will publish guidance, which will be written in consultation with interested parties. In fact, draft guidance covering some of the key areas of the new CFC rules was published today for consultation. Further to that, HMRC is encouraging discussions between companies and their customer relationship managers and will provide clearances on all aspects of the new CFC regime. Those are all ways in which companies will be provided with greater certainty about the way in which the new CFC rules will apply to them. Through our approach to engagement, we will keep the regime under review to ensure that it is operating in the intended way.

The changes to the CFC rules are a key part of the Government’s corporate tax reforms—reforms that will provide the right conditions for business investment and growth in the UK. Clause 180 should be introduced without delay. I therefore hope that hon. Members will not press their amendments.

I turn now to the amendments I mentioned earlier. We have been in discussion with business and advisers on them since the publication of the Bill in March. A number of the changes prevent a CFC charge from arising when the CFC’s profits are already taxed in the UK by other means, including when a shareholding is taxed, or when a tax arises under the debt cap rules or through transfer pricing. Some of the changes ensure that the rules that establish whether a foreign company is a controlled foreign company work properly and have the intended scope. Further changes ensure that the finance company rules work as intended, in particular in their application to banks and insurance companies. A number of other minor amendments improve the clarity and certainty of the new rules. That is further evidence of how we have worked closely with business to ensure that the new rules are effective and provide certainty to those applying them.

I appreciate that I have spoken for some time, and the only consolation for that is that I hope I have saved the hon. Member for Newcastle upon Tyne North from having to make some remarks. However, I have to say a word or two about the reaction from business. These reforms have been well received. I have already mentioned some businesses; following the publication of the Bill in March, one of the big four advisory firms announced that it was in discussion with 10 to 15 multinational companies that were considering locating substantial operations in the UK as a result of corporate tax reforms. The Confederation of British Industry commented that these much-needed changes

“will help make the UK a more attractive place for companies to invest, do business and create jobs”.

That confirms the message that Britain is open for business.

Reform of the CFC rules has long been identified as a priority by business. The new rules are designed to protect the UK tax base from the artificial diversion of profits, and are a further step towards achieving our aim of having the most competitive tax system in the G20. I hope that the clause and schedule 20 will stand part of the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I intend to speak to clause 180 and amendment 190. The Minister anticipated some of my questions and concerns, but unfortunately not all of them so I want to cover a few of the issues that have not been dealt with yet. To recap where we are with clause 180, in the past multinationals based in the UK have had to pay corporation tax not only on their profit in the UK but on that made through subsidiaries and branches abroad. In 2009 dividends paid back to the UK parent companies from subsidiaries were exempt from tax, but it left the CFC rules as the main measure of taxing overseas profits.

The Opposition acknowledge that the CFC rules have stopped companies moving their profits out of the UK to avoid tax, but they have also provided a disincentive for some companies to base themselves here in the UK. As the Minister explained, the clauses we are debating today are the culmination of a series of announcements and consultations over a number of years. They effectively mean that profits made in other countries by a multinational based here in the UK will no longer be taxed by the UK and only those profits made in the UK will be taxed.

When in government, the Labour party committed to moving towards a more territorial regime. We consulted extensively on how the rules could be changed to provide more certainty to business to ensure that the UK remained an attractive place to base multinational companies, but also to ensure that the UK tax base was not eroded by profits being moved offshore. We were aiming to legislate for changes in Finance Bill 2011 and so we support the principle of the legislative proposals. Anything that will make the UK a good place to do business, and will help our economy to grow out of the current double-dip recession, has to be a good thing. We have grave concerns, however, that the Government have not properly thought through the detailed consequences of some of the proposed changes. Unfortunately, the Minister has compounded those concerns because he is not willing to provide data or analysis on the potential implications, particularly for developing countries.

The amendment moved by the hon. Member for Bristol West would address those concerns before the legislation was implemented. The Minister, as I said in my earlier intervention, has made a strong case for amendment 190, and I would be interested to hear why he considers that an ongoing assessment of the impact of the changes is not advisable.

Additionally, given the complexity of schedule 20, which I think the hon. Member for Amber Valley referred to as being 60 pages long—

Nigel Mills (Conservative, Amber Valley)

The schedule is 97 pages long.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Was that 96 pages?

Nigel Mills (Conservative, Amber Valley)

No, 97 pages.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Okay.

A slightly less esteemed, albeit important, body, the Institute of Chartered Accountants in England and Wales, has described the schedule as “appallingly dense” and largely inaccessible, even to experienced readers. Whether the proposals will cost more than the Government’s current estimate, and—I know the Minister has sought to provide reassurance on this point—whether they will provide the certainty that business requires, are legitimate concerns.

The main subject of amendment 2 is the impact on international development, and Members on both sides of the Committee have made it clear today that that is a concern. A number of non-governmental organisations and outside organisations are also concerned about the potential impact on developing countries.

In a written answer to a parliamentary question last week, the Minister confirmed to me that the Government had not assessed the effect on other countries of the proposed changes to the CFC rules, stating, as he has confirmed today, that

“these rules are designed to protect the UK Exchequer by preventing artificial diversion of UK profits.”—[Official Report, 14 June 2012; Vol. 546, c. 561W.]

From that, and from his comments today, I take it that the Minister does not think carrying out such an assessment is either appropriate or necessary.

As the Minister mentioned earlier, the Government recognise that tax revenues are essential for development. In an article entitled “Free trade in Africa shows a way out of poverty,” the Prime Minister said:

“An African free trade area could increase GDP across the continent by about $62bn a year. That’s $20bn more than the world gives sub-Saharan Africa in aid. Backed by investment in people and infrastructure, sound government and effective tax systems, imagine what this would mean: businesses growing, new jobs on offer, families on the up, living standards transformed.”

I know that the Government are committed to ensuring that the aid that the UK gives to developing countries is not undermined by a lack of support for those countries’ revenue bases. That is why it seems unusual that the Government are reluctant to carry out any form of assessment of the potential impact of the CFC rules, despite the widespread concerns that have been expressed. The Government have also recognised publicly that

“tax avoidance in developing countries deprives governments of the vital income needed to build and maintain their public services.”

The very means by which they can protect their tax base could be undermined by these measures.

The Government have been asked during the past two years to carry out an impact assessment of the CFC rule changes, but have refused on every occasion to do so. It is not only the NGOs—ActionAid and Christian Aid have already been mentioned—that are asking for that assessment. Organisations such as the OECD and the International Monetary Fund have also recommended “spillover analyses” of the impacts on developing countries of changes of this type.

May I quote from a 2011 report by the UN, the IMF, the World Bank and the OECD? Entitled “Supporting the Development of More Effective Tax Systems”, it states:

“The G-20 countries’ lead role in the debate on”

the

“international tax system creates an obligation on them to ensure its smooth functioning. In that context, it would be appropriate for G-20 countries to undertake ‘spillover analyses’ of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries.”

It seems strange that, although the Government are willing to accept support and advice from and collaboration with those esteemed international organisations, they are completely disregarding the advice being given on these taxation changes. I would be grateful if the Minister could provide a better explanation of why the Government do not deem it appropriate or necessary to carry out any form of assessment of the impact of the changes. That is the basis for the first part of our amendment 190, which says:

“HM Revenue and Customs shall publish an assessment of the implementation and impact of the changes made in this schedule each year from commencement for the first three years of operation, including…the impact of the changes on developing countries and whether any further aid or technical assistance needs to be provided to those countries to safeguard their tax revenues”.

Some tax experts, I acknowledge, disagree that there will be the level of impact suggested by ActionAid—the estimate is about £4 billion. The Minister explained in some detail why the Government did not take that estimate on board. He mentioned that it was an assessment of 10 companies. I might add for the record that those 10 companies make up more than 20% of the FTSE 100 companies, so their proportion of the market is one that it is difficult not to take into consideration.

The Minister also explained that the tax treatment in each of the countries concerned was complex and not as simple as the assessment undertaken by ActionAid suggested. However, surely that makes the argument as to how vital it is that the Government use their resources and the information that they have available on the tax treatment of UK-controlled companies to inform an assessment that can be used and relied on and can give an indication of what the impact of these changes will be.

Ian Mearns (Labour, Gateshead)

Given the complexity of the subject, does my hon. Friend share my significant concern that a lack of transparency in the operation of CFCs and the way in which the taxation of subsidiary companies is dealt with could mean that, frankly, multinationals are getting away with an awful lot?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I agree. In fact, the Government ought to be concerning themselves not simply with subsidiaries but with branches in those countries where the legislation has been recently relaxed and what the impact of the new regime will be on transparency and in terms of a potential increase in avoidance. That is my second concern, which I will come to shortly.

I would like an explanation from the Minister on the question of developing countries. The amendment tabled by the hon. Member for Bristol West relates to that issue, and I have concerns to express in discussing the Opposition’s amendment 190. If the Minister does not credit the ActionAid assessment of the potential impact, why should not the Government carry out their own, or use some of the international agencies that would, I am sure, be willing to support such an assessment of how the measures may hinder the ability of developing countries to safeguard their tax base?

It seems a false economy to invest UK Treasury intake, up to £1 billion, which the impact assessment suggests the figure could be, in changes that will undermine the very progress towards which our international aid money, which increases year on year, is going. The Government need to explain why they have not carried out any assessment of that, and what they are going to do about it in coming years.

The second part of our amendment relates to concerns about the impact of the measures in terms of the cost to the Treasury, which could be much higher than expected. The arguments were briefly explored in the Minister’s comments. Serious concerns have been expressed that the Government have not factored into their costings the fact that companies may restructure to take advantage of the new regime, which would result in a much higher cost to the Exchequer, and more profits no longer being subject to UK tax.

The Government have said that they have “hopes” that some of that cost will be offset by companies bringing some of their functions and profits home to the UK. The Minister has failed to set out today the possible economic benefit of the relocation in the UK of those companies, including how many jobs would be created. Instead of engaging in evidence-based policy making, the Government have put forward vague evidence for positive impact, which seems to be based on anecdotal conversations with businesses. We do not object in principle to changes to the CFC rules, but it seems unusual at this juncture, and when we face the current economic challenges, for the Government not to have carried out a more detailed cost-benefit analysis of the changes.

The final issue dealt with by our amendment is tax avoidance, which was raised by my hon. Friend the Member for Gateshead, and the potential for that to increase as a result of the proposed changes. There is concern that they will result in less transparency than there is under the current regime, and that avoidance could therefore increase. I am sure that if that were to be the consequence, it would be unintended.

In the 96 or 97 pages of the provisions there are 10 targeted anti-avoidance schemes. That shows the level of concern, on the part of those who drafted these complex measures, that such schemes should be anticipated and headed off at the pass. The Government should today make a commitment to improving transparency, and that is what is called for in the third part of our amendment. It would mean that in

“each year from commencement for the first three years of operation”

the Government would undertake an analysis of

“whether the rules operate as expected and”—

importantly, as well, for business and investment in this country—

“provide certainty to companies”

as the Government intended. I am sure that hon. Members will agree that it is a reasoned amendment and a reasonable approach. Concerns about the changes have been set out, and it seems sensible for the Government to undertake an ongoing analysis of the impact for developing countries, Exchequer and Treasury forecasts and businesses themselves.

Sheila Gilmore (Labour, Edinburgh East)

Thank you, Mr Bone, for the opportunity to contribute on this issue. I want to speak primarily in support of amendment 190, but to make some general remarks as well.

Fundamentally, such provisions appear to give us a choice. If we seek to tax the foreign income of companies that operate in the UK, they may simply move elsewhere. The Minister spoke about some that either had done that or were threatening to do so. If such a company moves away entirely, we clearly do not get tax from it at all, and there are other implications for the economy in terms of employment and so on. It would be useful to see more information on how that is quantified and the degree to which a UK-headquartered company contributes to our economy. That is one argument. If we continue to seek to tax the foreign earnings of companies headquartered here, they may go. We could be killing the goose that might have laid the golden egg.

On the other hand, a company might be headquartered here, but we potentially still get very little tax from it, because changes in the CFC rules mean that foreign earnings will not be taxed. At times, we seem to be almost conceding to blackmail—“If you tax us, we go. If we stay, you can’t tax us, because we can still divert our earnings in such a way that we don’t pay very much tax.”

It is important for the Minister to outline the impact on the UK in more detail. Leaving aside the question of other countries, will we simply see a substantial loss in tax income? It is clear from the figures in the Red Book that the Treasury anticipates a loss in tax income to the country as a result of the changes. What are the countervailing advantages? What do we gain either directly through tax income coming in other ways or through the impact that such companies have on our economy if they are headquartered here? If we will lose a lot of tax without that countervailing gain, it raises serious questions about how the change will work.

Seema Malhotra (Labour, Feltham and Heston)

My hon. Friend makes an important point about what is likely to be the case in future, bearing in mind the forecasts of increased or reduced revenues to the Exchequer. Does she agree that it would make an important contribution to the debate if the Minister outlined what changes in corporate and company behaviour he expects or predicts as a result of the changes?

Sheila Gilmore (Labour, Edinburgh East)

I thank my hon. Friend for her intervention. It would be useful to know about that matter in more detail. It is important to be able to say whether, after a year, or after two or three years, the changes have had the impact that we say they have, or think that they will have, whether some companies return to operate in this country and what effect those types of company have here. I have heard it argued—it may be an exaggeration—that although many such companies have headquarters here, the extent of their operation is limited and a lot of their earnings, and therefore their profits, are located somewhere else. We have to ask whether such a small operation is really of such overwhelming benefit to our economy and whether that makes it worth losing the tax that was previously secured.

Another argument for change is that it would be simpler for companies to understand. Given the nature of the legislation that we are considering and comments by some about its impenetrability, it is not clear that change would simplify things. In fact, it may make it even more complex. Given such a large change in the way in which foreign earnings are dealt with and that there is substantial potential tax loss, it is incumbent on the Minister and the Government to tell hon. Members in due course about its impacts, about the tax loss and about the tax gain from having companies headquartered here, if there was not such a gain previously, and whether such companies have used tax havens less or whether much of their income is still located in tax havens rather than here. Those are important questions for the Government to deal with.

Presumably, a lot of relevant data will be available. We should not neglect to collect information about the tax paid by such companies and compare it with their previous situation, when they were taxed differently. We should know if companies have expanded their operation and about the impact of that on our economy. It would be a pity if we were not collecting such information and wanting to publish it.

A lot of people working in international development have asked questions and are gravely concerned about a possible adverse consequence of the changes, albeit unintended, for developing countries. The Minister said that the legislation on controlled foreign companies was never intended to aid developing countries. He said that that was not its primary purpose, that it was intended to deal with tax being collected from companies with foreign earnings, which was an issue of importance to the UK, and about how such companies tie up their inter-company arrangements. That may be so, but the opposite does not necessarily apply. The fact that the legislation was not intended as an aid to developing countries or to help them collect tax does not mean that the inverse is not the case and that a piece of legislation that we put in place, such as a review of our tax system and our policies, could not and will not have an adverse consequence on developing countries which may find that they lose income as a result.

As the hon. Member for Bristol West put it extremely well, we must think about the implications of this legislation on a lot of what we do across the Government. It sometimes feels as if we have one set of policies and priorities for one part of the Government, and a completely different set for another part. The Department for International Development is trying to build the capacity of developing countries in various ways through the provision of international aid, but if as a result of changes made in this Committee we create a situation in which those countries suffer a loss and are not able to collect as much tax as they might otherwise have done, it is almost as if we are simply pumping out money to fill a gap that we helped to create. That may be inadvertent and not deliberate, but it does not seem particularly sensible and that is where concerns arise.

The Minister has said that the situation is not as straightforward as organisations such as ActionAid have suggested. It is often alleged that such organisations exaggerate their case and perhaps present a rather alarmist view that may not stand up to great scrutiny, and in particular, the figure of £4 billion mentioned by ActionAid has come in for considerable criticism. The reality, however, is that some tax loss will arise in some of these countries. Not all of them have tax holidays, although some may do.

Seema Malhotra (Labour, Feltham and Heston)

My hon. Friend cites the ActionAid estimate of £4 billion in lost tax that could be avoided by UK-based multinationals because of this change. Does she agree that as we want to avoid any unintended consequences of this provision, and as there are differing points of view, it is extremely important that we understand what assessment has been made of its impact? HMRC and the Treasury should make that assessment publicly available to inform the debate so that nothing happens that we would all regret.

Sheila Gilmore (Labour, Edinburgh East)

I agree with my hon. Friend, and it would be helpful to have a projection of what might happen. Equally important—this will resolve some of the disputes about what the losses might be—is to see how things work out, assuming that clause 180 goes through and is enacted. The only way that we will know whether ActionAid and other organisations that have campaigned on these issues are right, or whether the Government are right to feel that much of this debate has been over-egged and is unduly alarmist, will be to see what actually happens. Until we can measure and clearly assess what is happening on the ground, the matter will still be unresolved and we will not be much further forward. It is often the case—we have seen this with other legislation, I think—that those campaigning against the change say, “The world is going to come to an end and we are all going to be sleeping in the streets,” and the Government say, “No, no, no, that’s just not true. Everything will be fine.”

If we talk in hypotheticals, the debate can become, not sterile, but difficult, and we appear to be doing that here. If that is the case, and we cannot necessarily prove it either way, to suggest that impact assessments are carried out and published does not seem unreasonable; they would be helpful. If it turned out that many of the fears were unfounded, people would no doubt acknowledge that, but if it transpired that there was a problem, we would have to turn our minds to ways in which to deal with it—ways in which countries could be assisted—and we would be able to do that only if we could gather the information.

I was unconvinced by the Minister’s assertion that it would be too difficult and complex to gather the information and to understand it. This is not the only issue that affects developing countries in relation to tax—it is one among many—and we need far more information sharing and transparency about international taxes generally. We must do things other than simply consider that one aspect; we need far better information about what tax is paid by the international companies in the various countries in which they operate; without it, it is hard to catch the tax in the appropriate place. Company structures can be complicated, with manufacture or extraction being carried out in certain countries and complex arrangements between the parent company and the companies operating in the developing countries. One way in which income is taken out of developing countries is through interest being paid by the subsidiaries on loans to start up, modernise or improve their businesses.

Many organisations that campaign on international development consider it important to get clear information; transparency is a first base from which to move forward. We should do that internationally in any event, and Britain should take the lead, both in how we operate and in how we encourage international organisations to operate. I presume that this is the kind of debate that the UK is leading at the G20, and that we will continue to do so, to ensure, not in isolation but in conjunction with our partners in the developed and developing worlds, that that begins to happen.

If the information will be gathered in any event, it should not be too difficult to assess the impact of the provision. If it had an adverse affect on developing countries, we would have to think carefully about how to help them plug a gap that had been created by our own actions. I do not think that we want to be in the position, in two or three years’ time, of huge campaigns being generated, perhaps by organisations such as ActionAid, saying how dreadful this has been, and calling on the Government of the day, which might not be the same as the current one—

Peter Bone (Conservative, Wellingborough)

For the benefit of the Minister, let me say that there has not been a new doctrine whereby the Minister has to reply without notes.

Peter Bone (Conservative, Wellingborough)

I remind the Committee that with this we are discussing the following:

Clause stand part.

Government amendments 46 to 51, 146, 52 to 56, 147, 57 to 59, 187, 60 to 110, 188 and 189, and 111 to 113.

Amendment 3, in schedule 20, page 520, line 31, at end insert—

‘42A Notwithstanding the provisions of this Part, this Schedule will not come into force until a full impact assessment has been prepared in conjunction with the Department for International Development reviewing the effect on developing countries’ tax revenue, and details of aid and technical assistance being provided to developing countries in order to increase the capability and technical expertise in their tax regimes to collect the taxes that are due in their countries, has been laid before and approved by the House of Commons.’.

Government amendment 114.

Amendment 190, in schedule 20, page 522, line 2, at end insert—

‘(3) HM Treasury and HM Revenue and Customs shall publish an assessment of the implementation and impact of the changes made in this schedule each year from commencement for the first three years of operation, including—

(a) the impact of the changes on developing countries and whether any further aid or technical assistance needs to be provided to those countries to safeguard their tax revenues;

(b) the cost of the changes to the Exchequer and whether they are consistent with HM Treasury forecasts;

(c) whether the rules operate as expected and provide certainty to companies.’.

Government amendments 115 to 117.

That schedule 20 be the Twentieth schedule to the Bill.

Sheila Gilmore (Labour, Edinburgh East)

In the interests of progress, I shall wind up by simply saying that I hope that, since we adjourned, the Government have become minded to accept the amendment.

Nigel Mills (Conservative, Amber Valley)

I want to make some brief remarks in praise of the way the Government have handled this reform. It is a testament to how it should be done. There has been long consultation on a complex area of law that has been in desperate need of reform. The matter has gone backwards and forwards, and there have been several drafts to try to get it right and as simple to work as possible. That is a credit to how tax policy should be formed.

It is, in essence, a necessary part of every developed modern corporate tax regime to try to stop businesses diverting profits into low-tax territories by moving assets or income offshore. We must have a measure that does that, but it leaves us with a rather blunt instrument when every UK company that tries to set up an overseas subsidiary is dragged into complex compliance rules and has to try to work out whether what it has done entirely commercially is treated as tax avoidance.

What we have here is a gateway test; businesses can look at a much simpler, shorter set of rules to see whether they have to apply the longer, more complex ones. That is a decent structure for how those operations should work. All those businesses that should not be caught and clearly are caught will have no tax exposure here. They can work that out pretty quickly and get on with what we want them to do—growing and investing. I do not say that we have simple, clear, easy-to-understand legislation; we have clearly ended up with something long and complex, but that is inevitable given the nature of the subject.

We have had a lot of discussion on various topics today. Where the rules have ended up is pretty good—about as good as we can get. I would hope that the vast majority of innocent businesses that are not trying any naughty tax planning will not have any real problem complying with them, though there will, no doubt, be the odd exception to that. That is where we want to be. It is right that the rules focus on the mischief—that is, businesses trying to avoid paying UK tax on UK-sourced income. We quite rightly do not wish to tax overseas-sourced trading income in the UK; we have all accepted that. The rules do not do that.

We have even accepted that we do not tax dividends from companies based overseas that pay another tax in the UK. They can pay those back to the UK to be reinvested tax-free. It would be bizarre to try to get there through an anti-avoidance measure. On balance, I think the measure is as good as it can be. I commend the Minister on it, and hope that he can speedily get these welcome reforms safely on the statute book.

Stephen Williams (Liberal Democrat, Bristol West)

I apologise to you, Mr Bone, and to Committee colleagues for not being as prepared as I should have been this morning. When we adjourned last week, we were on clause 54. It did not occur to me that in one fell swoop we would go from clause 54 to clause 179 this morning; that is why I did not have my notes with me. We had been moving at glacial pace; I think we had a taste of warp speed this morning.

I tabled amendment 2 after meeting ActionAid and Christian Aid simply to test how joined up policy making is, particularly in the context of a coalition Government; some might say that in a coalition Government, policy making is not always as joined up as it should be. We know that the attitude that the Treasury always knows best has been prevalent throughout many Governments of many political colours over many decades. I tabled the amendment to encourage the Treasury to work closely with a spending Department whose spending envelope is expanding at a great rate over the next few years.

In his helpful remarks, the Minister said that he did not want the Treasury to become the world’s tax policeman—I think that was the phrase he used and, if I may say so, it is Blairite in the scope of its ambition. I agree with him; we would not want our Government to be the world’s policeman in any context. That would be bad in principle, and I do not think that it would work in practice. Indeed, when I discussed the parameters of this amendment with ActionAid, I made it clear that I do not think it fair or reasonable to expect the UK Government to carry out an in-depth assessment of, potentially, 190 tax regimes around the world that might be affected by the provision, and I therefore accept what the Minister says on that point.

I do, however, want to hear that it is the Treasury’s intention to work closely with the Department for International Development to build up capacity among overseas tax authorities so that they can collect the taxes that their Governments decide are due but that are often avoided—I think I heard the Minister mention that issue, and perhaps he will confirm that when he sums up. Tax avoidance has been much in the news today, and as some regimes are perhaps susceptible to corruption and have tax authorities that are likely to be less developed or sophisticated than those in the UK, taxes are even more easily avoided in developing countries than they are in this country.

Since tabling the amendments I have discussed the position with my right hon. Friend the Member for Gordon (Sir Malcolm Bruce), who chairs the Select Committee on International Development. That Committee has since initiated its own inquiry and investigation into the impact of British tax policy and the tax capability of overseas Governments, and we wait with interest to see what the in-depth investigation by that cross-party Committee comes up with when it produces its report later this year.

The Minister has said many useful things that are now on the record and will be useful to ActionAid and other charities and non-governmental organisations that campaign on these issues. I hope that he will write to the Committee and set out in detail what the Treasury is doing in conjunction with DFID, and I am sure that there will be an opportunity to give the issue another airing on Report.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship, Mr Bone, and if I may, I will briefly respond to the points raised in the debate, having already set out in some detail earlier today the rationale behind the policy.

Her Majesty’s Revenue and Customs and the Government provide assistance more broadly to developing countries to help them increase their tax capacity, and I would be happy to elaborate on the remarks that I made this morning and set out for the benefit of the Committee some of the work that is done by DFID—or HMRC, because the two Departments work closely together. This country has a proud record in assisting developing countries in developing their tax capacity, and we are keen to continue with that. My hon. Friend the Member for Bristol West pressed me on that point, and I am happy to confirm that the Treasury, HMRC and DFID will continue to work closely on that issue. The Department for Business, Innovation and Skills also has an interest in the area, and we will continue to work across the Government.

Issues were raised about the economic benefit resulting from reform of the rules on controlled foreign companies. I shall refer back to my earlier speech. Once the new rules come into effect, we expect to see even more companies locating or relocating their business activity to the United Kingdom. That will have wider economic benefits, with new jobs created and increased investment in the UK, which I hope all parties will welcome.

How will we assess the benefits of the provision? Of course, the Government routinely publish detailed information on the corporation tax system and detailed statistics on corporation tax receipts. The Office for Budget Responsibility publishes information on corporation tax forecasts and the economic and fiscal outlook. At the Budget, HMRC publishes detailed information on any proposed changes, particularly tax information, as well as impact notes and policycosting documents.

We have introduced a greater degree of transparency and put more information in the public domain than in the past. I understand that the Opposition will press for further reviews, but we have taken substantial steps forward in terms of transparency.

On keeping the regime under review, the Government meet business and professional tax advisers in a number of forums, such as the corporate tax liaison committee, the Business Forum on Tax and Competitiveness, which met this morning, and the Business Tax Forum. Interested parties have the opportunity to raise their concerns about any matter in those forums, including CFC reforms.

I was asked whether we should subsequently make a commitment to an impact assessment. Tax returns for the first three years of this regime will not be available until 2017 or later, and HMRC does not have the power to obtain information about other countries’ tax affairs. I have made that practical point in relation to other amendments.

Behavioural assumptions have been made in estimating the costs, including the cost of restructuring, but no specific assumption of additional tax, in line with the usual prudent basis for cost estimation, has been included.

Any profits derived from UK operations are robustly defended by the rules. Indeed, there is improved targeting of UK profits, compared to the previous regime. We are excluding foreign profits, which is consistent with the overall move to territoriality.

I thank my hon. Friend the Member for Amber Valley for his support on where we have got to. Careful consultation and deliberation have been needed during this long process, and at times there has been criticism of where we have got to. In the previous Parliament, there was significant criticism of what was happening with regard to CFCs. However, we have got to a good place now, where businesses appear to be enthusiastic, and we anticipate their relocating to the UK, which all Committee members should welcome.

In such debates, it is right for Committee members to probe and ask questions, and there have been a number of thoughtful interventions from Members of all parties. However, if the Opposition wish to oppose reforming CFC legislation, that will do them no favours, in terms of business reaction. When there are announcements about businesses locating or relocating themselves in the UK, the Government will be tempted to say that that is happening as a consequence of a policy that was opposed by the Opposition. It is for the Opposition to decide whether, politically, that is a sensible place to be.

I would rather not make such partisan points. I would rather we sent a clear signal to businesses around the world that there is unanimity within the UK and a shared desire to reform our CFC regime to ensure that Britain is open for business, and to say that we want to attract businesses to the UK. Whether we can send that message is up to the Opposition. I can say, on behalf of the Government, that we are pleased with the progress that we have made. This is a substantial step forward, in terms of making our tax system more competitive. I commend the clause to the Committee.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I will not take up much of the Committee’s time on this matter, but I want to reassure the Minister and Members on the Government Benches that we Opposition Members do not oppose reform of the controlled foreign company rules. We set these wheels in motion and very much support anything that can bring investment and growth to the UK economy.

I shall make a couple of comments on our amendment 190. It does not seek to delay or water down the controlled foreign company reforms in any way, but would monitor three specific impacts on an ongoing basis for the next three years. It is disappointing that the hon. Member for Bristol West has withdrawn his amendment and will not be putting it to a vote.

Peter Bone (Conservative, Wellingborough)

Order. Mr Williams was not able to withdraw his amendment at that point. When the debate is finished, I will ask him to do so formally.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you for that clarification, Mr Bone. We will see whether amendment 2 will be pushed to a vote. It asks for a delay in the implementation of the rules. That is not something that we Opposition Members are asking for. We are asking for the impact, particularly on developing countries, to be reviewed. We have discussed the complexity surrounding the rules, the resources that are available, the importance of our own efforts—the Treasury and HMRC, working together with DFID—to analyse the effects of the rules, and how best we can target the aid that the UK gives to developing countries. It would be a shame to give aid that is spent only patching up the mess that we may create, inadvertently and unintentionally, with the changes that we are considering today. That is the purpose of our amendment, and I hope that Government Members, and particularly the hon. Member for Bristol West, will be able to support it.

Stephen Williams (Liberal Democrat, Bristol West)

I beg to ask leave to withdraw the amendment.

Schedule 20 - Controlled foreign companies and foreign permanent establishments

Clause 181 - Transfers within a group by companies carrying on ring fence trade

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

This clause is technical and considered relatively uncontroversial by the industry. It ensures consistency of tax treatment of all gains and losses within the so-called ring fence. It amends section 171A of the Taxation of Chargeable Gains Act 1992, which provides for an election to transfer a gain or loss from one company to another member of the group. It restricts the scope of section 171A. Under the current legislation, where there is a transfer of a ring-fence chargeable gain from a ring-fence company to a non-ring fence company, the ring-fence gain is not subject to a supplementary charge, because the non-ring-fence company does not fall within the scope of the supplementary charge. I am sure that that is known to everyone in detail.

I want to make a few comments so that the Minister can, if she wishes, bring up any concerns or issues relating to the measures. I understand that we want to reach a certain point in the Bill—having given the measures proper scrutiny, of course—in good time for 7.45 pm, when people may have other commitments, although the Scots among us may perhaps take a different view on that. I will therefore restrict my remarks.

Chloe Smith (Conservative, Norwich North)

I will honour that spirit by being as brief as I can in discussing clauses 181 and 182. Clause 181 ensures that an election cannot be made to transfer a ring-fence chargeable gain from a company carrying on a ring-fence trade to a company not carrying on a ring-fence trade, and so avoid supplementary charge on the gain.

For hon. Members who are still in the dark, this provision relates to oil and gas activity, notably in the UK continental shelf. By way of background, this clause makes changes to the oil and gas fiscal regime which applies to companies producing oil and gas there. The regime, as Members will know, is made up of three main taxes: petroleum revenue tax, ring-fence corporation tax, and supplementary charge.

The introduction of this clause and clause 182 was announced on 6 December 2011 and both clauses are effective from that date. Clause 182 simply confirms that the supplementary charge applies to chargeable gains as ring-fence corporation tax does. Clause 181 affects the way asset disposals by companies in a group are treated for the purposes of ring-fence corporation tax and supplementary charge on chargeable gains. The general rule is that companies that are members of the same group can elect to transfer chargeable gains and losses between them. The rules for the election were simplified in the Finance Act 2009. However, an unintended consequence was that where a transfer took place from a ring-fence company to a non-ring-fence company, any ring-fence chargeable gain transferred would not be subject to supplementary charge. Therefore, as I have said, the changes made by the clause ensure that an election cannot be made to transfer a ring-fence chargeable gain from a company carrying on a ring-fence trade to a company not carrying on a ring-fence trade.

The change will affect only group companies carrying on a ring-fence trade that were contemplating making such a choice, the effect of which could be to avoid paying a supplementary charge applying to a ring-fence chargeable gain. It is probably clear to the Committee that we wish to avoid any such use of an unintended consequence, and the Government’s firm view is that the scope of the supplementary charge matches that of the ring-fence corporation tax.

The clause supports the Government’s commitment to protect revenues and promote fairness in the tax system by removing an unintended consequence of current legislation. Companies will no longer be able to make such a side-step on the supplementary charge, and it is anticipated that the clause may, as a result, increase Government receipts by some £10 million per annum.

The amendment was introduced with immediate effect from December last year to prevent loss to the Exchequer in the period between the announcement of the policy and enactment of the legislation. As the hon. Member for Kilmarnock and Loudoun has said, the clause is not controversial. We are not aware of any calls from the industry for changes to the clause since its publication in draft form last year.

I will briefly refer to the package of oil and gas measures that were announced at this year’s Budget. The package was warmly welcomed by industry and will help to maximise the potential return from the UK’s natural resources. In conclusion, the clause supports the Government’s objective of protecting revenues in that vital industry by ensuring that the supplementary charge applies to ring-fence chargeable gains as intended.

Clause 182 - Supplementary charge

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We seem to be making good progress, and I hope to continue that. I mentioned earlier that 7.45 was a key moment for many people in the Committee. I have to say that 4 August will be a key moment for Kilmarnock football club, which has on that day drawn “club 12” in the opening home game of the season. Those who are familiar with the current disputes involving certain football clubs and taxation issues—there is an element here—will, I have no doubt, understand the meaning of “club 12”.

To return to the issues of oil and gas, clause 182 clarifies the definition of the scope of the supplementary charge set out in section 330 of the Corporation Tax Act 2010. The clause provides that that supplementary charge be charged by reference to a company’s ring-fence profits. As the Minister has indicated, the clause has effect from 6 December 2011.

The supplementary charge is chargeable on a company’s adjusted ring-fence profits as if it were an amount of corporation tax chargeable on the company. The company’s adjusted ring-fence profits for an accounting period are currently defined in section 330(2) of the Corporation Tax Act as the profits of the company’s ring-fence trade chargeable to corporation tax, on the assumption in subsection (3) that financing costs are left out of account.

It was the Government’s intention when the legislation was first introduced in 2002 that a company’s adjusted ring-fence profits should include all profits that could arise to a company carrying on a ring-fence trade from ring-fence activities. In other words, the intention was that the scope of the supplementary charge should match the scope of ring-fence corporation tax. This includes chargeable gains, which can arise on the disposal of an interest in an oil licence.

I am sure the Minister can confirm whether this is the case, but as I understand it, it remains the Government’s view that under the existing law the scope of the supplementary charge matches the scope of the ring-fence corporation tax. However, the Government are aware that some people in the industry take a different view, believing that chargeable gains fall outside the scope of the supplementary charge. For that reason, as I understand it, this technical clause clarifies the scope of the supplementary charge by ensuring that it matches that on the ring-fence corporation tax, in accordance with the Government’s intention when the legislation was first enacted in 2002.

Chloe Smith (Conservative, Norwich North)

Again, I shall be brief. [ Interruption. ] May I pay tribute to the cheerleaders? Clearly, they are cheerleaders not for the Finance Bill but for England tonight in our match against Ukraine.

Chloe Smith (Conservative, Norwich North)

Returning to the scintillating matters before us in the Finance Bill, as the hon. Member for Kilmarnock and Loudoun noted, the clause confirms that the scope of the supplementary charge matches the scope of the ring-fence corporation tax. Both taxes apply to the profits from upstream oil and gas production. The clause complements clause 181, which we have just discussed, on the clarification of revenue. Before I set out the changes made by the clause, I shall put in a little background, some of which the hon. Lady pre-empted, so I thank her for that.

When the supplementary charge was introduced in 2002, it was the intention that a company’s adjusted ring-fence profits, on which SC is chargeable, should include all the profits that could arise from ring-fence activities. In other words, the intention was that the scope of the SC should match that of the RFCT. That includes chargeable gains, which can arise on the disposal of an interest in an oil licence.

The Government’s firm view is that the law as currently worded achieves the intention of matching the scope of the two taxes, but the Government are aware that some in the industry consider that the matter is not free from doubt. There are those who consider that chargeable gains fall outside the scope of the supplementary charge. The clause therefore confirms that the scope of the supplementary charge matches that of ring-fence corporation tax, providing certainty on the point. It will not change the treatment of any company operating in the oil and gas industry, but it confirms the current position by way of a simple clarification.

The Government do not accept the suggestion made by some in the industry that the measure amounts to a change in the law, and nor do we accept the argument of a small number of companies that the clarification should not apply to chargeable gains that were held over before 6 December and will crystallise after that date. The Government’s view is that all ring-fence chargeable gains that arose or crystallised before 6 December were subject to the supplementary charge. The clause also confirms what would also have been the position under the law as it is currently worded: that gains arising or crystallising on or after 6 December are likewise subject to the supplementary charge.

In conclusion, the Government have always been absolutely clear that the UK fiscal regime for oil and gas seeks to encourage investment and innovation in the UK continental shelf, while ensuring a fair return for taxpayers and clarity through the relevant tax code. Together with clause 181, the clause supports the Government objective to promote fairness in the tax system while also providing clarity and certainty for companies.

Clause 183 - Relief in respect of decommissioning expenditure

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

That schedule 21 be the Twenty-first schedule to the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I need some additional minutes to speak to some of the broader issues arising from the clause, because I heard the Minister on an earlier clause refer to the plan for the future of the oil and gas industry. It is fair to say that at the time of the 2011 Budget, there was some consternation among the industry at the outset regarding some of the measures announced. I have several pages of quotes—I will not read out every one—but suffice it to say that at that stage, a whole range of industry spokespeople felt not only that the Government had not consulted them in advance, but that some of the tax measures, which were described as a tax grab, a tax hike, and so on, would be particularly problematic for the industry. I may say a little more about that when I ask the Minister some particular questions.

Clause 183 and schedule 21 restrict to 20% the relief available for decommissioning expenditure for supplementary charge purposes by increasing the profits liable to the supplementary charge when decommissioning expenditure is taken into account in computing those profits. Where such expenditure reduces the amount of petroleum revenue tax chargeable, the schedule also reduces the profits liable to the supplementary charge, where the profits resulting from the reduction in PRT would be subject to the supplementary charge at a rate of more than 20%. The schedule further provides that losses arising from mineral extraction allowances given in respect of decommissioning expenditure are brought within the scope of the provision, which extends the period in which loss relief may be given.

The Minister has already referred to the timing of the implementation and introduction of the charges. In this case, the charge is effective from 24 March 2011, and the supplementary charge, therefore, increases from 20% to 32%.

At Budget 2011, it was announced that legislation would be introduced in the Finance Bill 2012 with effect from Budget 2012 to restrict the rate of tax relief from decommissioning expenditure for the purposes of the 20% supplementary charge. The schedule simply seeks to ensure that the principles that govern the restriction of decommissioning relief are applied consistently to PRT and non-PRT fields. The schedule also ensures consistency of treatment on decommissioning expenditure with regard to the restriction of relief and access to the extended period for which losses may be carried back.

An explanation of why restricting relief on decommissioning expenditure to 20% is fair when a rate of 32% is applied to profits might be helpful, because there has been some discussion on that point. The heat from the original debate has subsided, but the point I hear most often from people in these industries is that they need certainty to plan for long-term investment. The industry, therefore, is focused on the legislation required to ensure the contractual entitlements to such relief. In other words, each company wants to be certain of the relief’s future so that it can plan accordingly. I understand that the Minister will further consult the industry on that. Will she say a little more on the timing and scope of that consultation? How will the position be monitored?

Will the Minister also indicate how she intends to use legislation and policy to incentivise new activity by ensuring that smaller companies are able to operate at the margins of those areas where the larger companies work? How will she ensure that companies have the certainty they are looking for?

A response to those questions from the Minister would be helpful. We all want to see the future of our oil and gas industry in the UK, and we also want security of supply. Concerns have been raised that if we do not get the investment infrastructure right—again, there are concerns both offshore and onshore, particularly for the petroleum refining industry—the cost of building, creating and modernising the infrastructure are not necessarily incentivised by the taxation regime.

I appreciate that not all of that can be addressed by this one schedule, or indeed by this Bill, but it would be a helpful signal to the Committee and the industry if the Minister explained how she intends to take matters forward.

Chloe Smith (Conservative, Norwich North)

I will, with pleasure, tackle the questions about clause 183 and will also briefly refer to some of what clause 184 does. Clause 183 and schedule 21 make changes to ensure that the rate of tax relief on expenditure related to the decommissioning of oil and gas fields is capped at 20% for supplementary charge purposes. To set out some background, let me take us back to Budget 2011 when, as part of a sizeable package to support motorists, the Government introduced a fair fuel stabiliser. The Committee will well remember that at that Budget we were able to reduce fuel duty by 1p in order to support the motorist. This means that the rate of supplementary charge on the profits from oil and gas production is higher when, as now, oil prices are high and activity is more profitable.

At Budget 2011, the rate of supplementary charge was therefore increased from 20% to 32%, where it has remained. If oil prices fall below a trigger price of £45 per barrel on a sustained basis, the fair fuel stabiliser will reduce the rate of supplementary charge back to 20%, on a staged and affordable basis. However, as the clause makes clear, the rate of tax relief given for decommissioning will not change with that supplementary charge rate. As hon. Members may already know, licensees in offshore oil and gas fields are required by law to decommission their installations at the end of a field’s life. The oil and gas fiscal regime provides tax relief on the costs of that decommissioning.

The restriction in clause 183 and schedule 21 means that the rate of relief will remain at 20% for SC purposes. The total rate of relief that companies receive on their decommissioning costs will therefore remain at 50%, or 75% for fields that pay petroleum revenue tax. This measure is designed to ensure that companies are not encouraged to bring forward the decision to decommission mature fields when oil prices are high in order to obtain a higher rate of relief. The Government are committed to ensuring the maximum economic recovery of oil and gas in the UK continental shelf. Clause 183 and schedule 21 seek to ensure that we do not give companies an incentive which undermines this objective by allowing them to choose to decommission fields for tax reasons, even though they may still have potentially recoverable reserves.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I welcome what the Minister is saying about the importance of not encouraging or wrongly incentivising companies to decommission at an early stage to take advantage of some kind of tax break. How does she balance that with ensuring that the taxation regime encourages further investment? I am thinking particularly of the balance between some of the larger companies and the smaller companies.

Chloe Smith (Conservative, Norwich North)

The hon. Lady is only a micro step ahead of me. I will do just that in a moment and on clause 184 too. I suspect we have common interests in the principles, which are to ensure that the UK continental shelf performs to the best of its economic ability.

The clause restricts the relief available for decommissioning expenditure for SC purposes to 20%. In doing so, it seeks to ensure that the principles governing the restriction of decommissioning relief are applied consistently to fields that pay petroleum revenue tax and those that do not. It also provides that losses arising from mineral extraction allowances in relation to decommissioning expenditure are eligible for the same loss carry-back periods as apply to losses arising from plant and machinery capital allowances in respect of decommissioning expenditure.

The point I want to take forward in answer to the hon. Lady’s question is how to encourage maximum production from appropriate fields, and how to incentivise smaller companies. The point is absolutely clear. The clause goes hand in hand with a much broader piece of work that the Government have done to provide the sort of certainty on decommissioning relief that I suspect she wants to hear about. That work began last year, and has continued into this year.

We announced in the 2012 Budget that the Government will legislate in 2013 on a contractual approach to provide further long-term certainty on decommissioning tax relief. Perhaps those of us who are lucky enough to be here again on the 2013 Finance Bill will enjoy every moment of that—if we are not put on the libraries committee in the meantime. The announcement in the 2012 Budget followed close engagement with the industry, which has warmly welcomed our proposed approach to provide greater certainty for the investment that we all want to see on the UK continental shelf. We believe that it should result in billions of pounds of additional investment and production over the life of the basin at no net cost to the Exchequer.

We will discuss further points on clause 184 that relate to how we can incentivise smaller companies to take part. They have been very much part of the discussions that I and my Department have had, and of the work that I outlined. Indeed, they can be discussed with field allowances.

I want to make it clear that we value consistency between the definition of decommissioning expenditure used in the clause and schedule, and in any contract in respect of the wider certainty work. However, I think it will be one of the issues covered in the consultation on decommissioning certainty that the hon. Lady asked about and which will be published later this year. Because of that ongoing consultation process, the clause includes a power to amend the definition of decommissioning expenditure through secondary legislation.

In conclusion, the clause and the schedule will ensure that companies remain eligible for tax relief worth half, or in some cases three quarters of their decommissioning costs. Losses arising from those costs will continue to qualify for generous carry-back provisions, and the clause seeks to ensure consistency of treatment for different types of decommissioning expenditure. We believe that restricting the rate of relief in that way is the most sensible way to address the risk that companies might otherwise be incentivised to accelerate the decision to decommission mature fields on tax grounds. The clause and schedule also complement the Government’s wider ongoing work to ensure that companies have long-term certainty on decommissioning relief, which will be the subject of consultation in due course.

Clause 184 - Reduction of supplementary charge for certain oil fields

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

That schedule 22 be the Twenty-second schedule to the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Given that we may have strayed into some of the territory of clause 184 during our previous discussion, I shall be brief to allow the Minister to respond. In summary, the clause and the schedule amend the field allowance legislation in chapter 7 of part 8 of the Corporation Tax Act 2010, with which we are all becoming extremely familiar, or we will be when the Committee has finished. The amendments enable the allowance to be extended to fields that have already been developed. As the Minister has indicated, the field allowance reduces the amount of profits, subject to the supplementary charge, when fields meet specific criteria. It is currently available only for new fields, and a new field is described as an oil field that is a qualifying oil field, by virtue of satisfying particular criteria, and whose development is authorised for the first time on or after 22 April 2009. I heard what the Economic Secretary said about recognising the importance of securing ongoing investment in existing North sea fields and infrastructure, and of looking to the future in giving industry the certainty that it needs to make the investments required, and I am interested, therefore, to hear what she has to say about how the measure will affect industry.

The Economic Secretary indicated that she would say something about smaller companies, and it would be helpful if she also mentioned some of the steps that will be introduced in the Finance Bill 2013. Whether or not we are here to be part of that, I think that we will all continue to take an interest in the matter, and it would help, therefore, to have an indication of what the stepping stones are in the consultation with industry, what she anticipates doing and how she anticipates reporting back to the House during that period, so that at Finance Bill 2013 we do not find ourselves stumbling across changes, complex clauses or technical amendments on which we have not been fully updated. I look forward to hearing what the Minister has to say.

Chloe Smith (Conservative, Norwich North)

I wonder whether at the outset I ought to decline the hon. Lady’s kind invitation to provide a full update on a consultation that has not yet taken place. I happily undertake, however, to come back as appropriate as the work progresses, to keep Members updated. What I will say about clause 184 might frustrate Members with its technicality, but not, I hope, its length. There are, however, a number of important concepts to explain.

The field allowance is another important element of the ring-fence fiscal regime for oil and gas production. Under the previous clause, we spoke about how the Government are setting out a contractual approach, which will provide certainty to industry on the relief available in decommissioning expenditure. In that debate, I said that I was not sure whether one could ensure certainty. I was, of course, being light-hearted; a mathematical moment took me about whether one could ensure certainty in life. I want to make it absolutely clear that the Government are consulting on taking a contractual approach to providing the type of certainty that industry has asked us for; it has worked carefully with us on its design.

Industry has also been engaged with extensively, and it has been extremely constructive in discussing field allowances, which are the second important element, alongside decommissioning certainty, in our fiscal regime for oil and gas production. Field allowances facilitate investment in projects that are economic but which might not be sufficiently commercial to be developed without some reduction in the level of tax. A field allowance would achieve that by shielding an initial portion of income in a qualifying field from supplementary charge, and reducing the overall tax liability of the company or companies developing the field.

To date, the field allowance has applied only to new fields—those that were first given development authorisation on or after 22 April 2009. Before Budget 2012, four categories of field qualified for the allowance: small fields, heavy oilfields, deep-water gas fields, and high-pressure, high-temperature fields. At Budget 2012, the Government announced a range of new measures to support investment in the UK continental shelf, including a package of changes to the field allowance regime, which were focused on increasing the development of commercially marginal fields. Companies that develop such fields may often—although not always—be the smaller firms that the hon. Lady has spoken about. We think that our work on field allowances and decommissioning certainty will help companies across the basin, including smaller ones; indeed, the Budget 2012 announcements included changes to a new small-field allowance. I shall run through a few more aspects of that package before returning closely to what clause 184 does.

The announcements follow close discussions between Government and industry since the 2011 Budget. They include changes to the amount and scope of the small-field allowance and the introduction of a new category of qualifying fields targeted at particularly deep fields with sizeable reserves, as are found in the west of Shetland region. The Government also announced that we would introduce legislation to enable the field allowance regime to be extended to development projects in fields that have already been approved—so-called brownfields. That is the issue that clause 184 and schedule 22 address.

In previous debates, we covered how important it is that the tax regime in the North sea continues to provide the right framework for the development of the continental shelf—not only existing fields, for which we wish to continue to encourage economic production, but also the possible development of new fields. As Committee members know, as fields develop, there are often opportunities for incremental investment. Those are referred to as brownfield opportunities, and that kind of additional investment can bring significant benefits. It can result in greater overall reserve recovery and therefore tax take. It can also prolong the life of infrastructure, and it is vital to exploit that opportunity.

A strong message we heard in our work with industry is that it wants the Government to address flexibility in the tax system to cover the kind of investment that we are discussing. There are examples of incremental projects that companies are considering, where further reserve recovery would be economic, but where the tax regime makes the decision to take forward additional development commercially marginal. Not going ahead could have an adverse impact on our economy.

The clause and schedule extend the existing field allowance legislation. They enable the allowance to be extended to fields that have already been developed and are to undergo a programme of additional development authorised by the Department of Energy and Climate Change. As with existing legislation applying to new fields, the clause and schedule give the Government powers to determine the structure and amount of any such allowance, including any relevant qualifying criteria, through subsequent secondary legislation. They also give the Government the ability to provide a field allowance retrospectively, provided that they do so for wholly relieving purposes. The implementation of any such allowance through secondary legislation would of course be subject to the affirmative procedure, which I am sure gratifies you, Mr Bone.

On timing, a feature of brownfield projects is that they can extend the life of assets that are otherwise ready to be decommissioned. It is important to note that any remaining reserves reliant on the associated infrastructure could be permanently lost at that point, including reserves in other nearby fields. That is not in the UK’s interest. Some companies are likely to decide whether to decommission some assets this year. Some of those decisions could be affected by the availability of a field allowance for brownfields. By legislating now, the Government are therefore ensuring that we have enough flexibility to make any such allowance operational within a short time frame.

With a legislative framework in place, we will continue to engage with industry on how an allowance could be structured to facilitate investment in commercially marginal fields while protecting Exchequer revenues. As hon. Members may know, industry has firmly welcomed clause 184, which follows the months of engagement I mentioned. It is a positive clause, which means that the UK oil and gas fiscal regime can continue to develop in a way that not only recognises investment in new fields, but allows the possibility of making the most of existing assets in the continental shelf as the basin matures.

Peter Bone (Conservative, Wellingborough)

Before I put the question, I want to say for the benefit of Ministers that they do not have to move clauses and schedules that are already in the Bill. It saves a bit of time if they do not.

Clause 185 - Rates of Tobacco Products Duty

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We have moved on rapidly from discussing the oil industry to discussing tobacco products. The clause provides for changes to the level of excise duty on tobacco products, including cigarettes, cigars, hand-rolling tobacco, other smoking tobacco and chewing tobacco, to take effect from 21 March 2012. We all understand the concerns around smoking, the health implications and the consequences for some of the least well-off people in the various communities in the UK. Successive Governments have chosen to maintain high tobacco duty rates to support health objectives. They have also ensured that tobacco duties continue to contribute to Government revenues and fiscal consolidation. Over the years, a link has been made with the price of tobacco products, the level of demand and the issues around health.

Under the clause, excise duty on all tobacco products is increased by 5% in real terms, in addition to the retail price index and the pre-announced increases of 2% above inflation on all tobacco product duties that will be maintained in 2013 and 2014—the so-called escalator. That duty, together with the consequential VAT increase, will on average increase the price of a pack of 20 cigarettes by 37p, a pack of five small cigars by 12p, a pack of hand-rolling tobacco by 37p and a pack of pipe tobacco by 20p. The revenue yield from those changes is estimated at £70 million in 2012-13.

I should have perhaps said at the outset that I have never been a smoker. As someone who was actively involved in sport in my much younger days, I never felt the need to take up that particular hobby as I had to spend my time training. None the less, I do wish to comment on the questions that have been raised by some in the industry about the excise duty and VAT rises and also about the potential impact of higher tobacco prices on the sale of illegal and cheap imports coming into the country. Potentially, the non-UK duty-paid products will impact on the duty-paid products. The industry has done some work on this issue and preliminary results show an increase in the non-UK duty-paid products this year compared with the same period last year. There is a fear that there will be further large increases in the current year.

Will the Minister tell us how the Treasury views the future and whether it will consider the scale of future duty increases on tobacco products? Does it intend to continue with the increase in tobacco duties by 2% above inflation in each of the next two Budgets in the face of rising levels of non-UK duty-paid products or does it intend to balance out some of those issues? I ask that question because in the 2011 Budget, the changes that were announced by the Chancellor to reduce tax differentials were meant to address the exploitation of the tax structure by those producing cheaper cigarettes and the revenue loss caused by the downtrading from the more expensive brands to the cheaper cigarettes. Does the Minister believe that that has been successful? I understand that some data from Her Majesty’s Revenue and Customs suggest that, far from the differential decreasing, the gap has actually widened, and that, potentially, downtrading has continued. It would be helpful if she could say something about that. If the information is not all there, can this issue be considered in more detail at this point in time? Will the Minister consider undertaking some work to try to understand the impact of the changes in structure, and to look ahead to the next Budget in terms of how best to ensure that the Government’s policy is successful?

Will the Minister refer to the suggestion—I understand that some in the industry would be supportive, though others would not—of a minimum excise tax? In other words, a point would be set below which manufacturers of cheaper products would be forced to make an additional excise payment or simply increase the prices to comply. I understand that a similar proposal is currently being introduced by the Irish Government in their Finance Bill. Some who are involved in considering health issues and who want to ensure that smoking is not made more attractive, particularly to younger people, have suggested that this is something that the Government should consider. Perhaps the Minister could give us an indication of whether she intends to introduce any further changes to the tax and duty system in relation to cigarettes and other tobacco products linked to health issues.

I hope the Minister will also be able to address the measures relating to enforcement and anti-avoidance. I attended a useful debate in Westminster Hall some time ago, as the Minister will no doubt recall. We were able, in a non-partisan and non-party political way, to discuss the serious issue of ensuring support for all health initiatives, while at the same time ensuring that those who were determined to undermine the taxation system and criminal law were brought to account and held to account.

With those few remarks, I ask the Minister to answer those questions. I may come back if I feel there are other points I wish to raise.

Chloe Smith (Conservative, Norwich North)

I shall not take too long, as I suspect that there is some consensus in the Committee on the health impacts of smoking and other aspects relating to tobacco products.

Clause 185 makes changes to ensure that tobacco products duty continues to contribute to wider efforts to reduce the deficit and support the Government’s health objectives. It reduces the affordability of smoking, which is acknowledged to be very effective in encouraging smokers to quit, and in discouraging young people from taking up smoking—points finely put across by the hon. Member for Kilmarnock and Loudoun. I will endeavour to answer her questions as I move through my comments.

It is clear to all of us that smoking kills. We have all been brought up with that message, depending on our ages and what advertising campaigns we grew up with. Smoking kills half of all long-term users and is the single biggest cause of inequalities in death rates between the richest and poorest in the UK. Smoking accounts for more than 100,000 deaths in the UK each year, and continues to be the single largest cause of preventable illness and premature death. Treating smoking-related illnesses has been estimated to cost the NHS £2.7 billion a year. Maintaining high levels of tobacco products duty, alongside continuing action to clamp down on tobacco smuggling, which I will come on to in a moment, is a key part of the Government’s strategy to reduce the prevalence of smoking.

Clause 185 increased the duty paid on all tobacco products by 5% above RPI from 6 pm on 21 March 2012. The new rate therefore adds 37p to a packet of 20 cigarettes or a 25 g packet of hand-rolling tobacco. The clause will raise an additional £260 million over the next five years, which will make an extremely valuable contribution to Government revenues and to fiscal consolidation.

In one of her many questions, the hon. Member for Kilmarnock and Loudoun tempted me with talk about future tobacco rates. As I have made clear, because this type of rate becomes effective from a given time on Budget day, I am unlikely to be able to stand here, many months in advance, and give her the means, if she so wishes, to stockpile—I am sure that she would not wish to do such a thing.

The fact is that tobacco duty is the subject of some debate. During the year, I have discussed the issue with and received information from a range of industry stakeholders, including, crucially, those campaigning on the health side. That kind of engagement will certainly continue, including no doubt at the time of next year’s Budget.

Ian Mearns (Labour, Gateshead)

I should declare an interest as a member of the all-party group on smoking and health, and I am still a member of the Gateshead Smokefree Alliance. I am very keen to see a reduction in the prevalence of smoking among the general population of my constituency and across the whole country. I know that, across Departments, the Government are considering a whole range of measures—including plain packaging and a reduction in the display of marketing—but it is clear that the tobacco industry needs new recruits. As the Minister pointed out, annually about 100,000 people die prematurely from the effects of smoking. To replace those who have died and, sadly, can no longer buy cigarettes, the tobacco industry needs new recruits, and it is determinedly marketing towards young people. Have Treasury Ministers thought about taxing products that are particularly aimed at young people?

Chloe Smith (Conservative, Norwich North)

I thank the hon. Gentleman, and everyone in the House and in the all-party group who do sterling work on this topic. I know that several colleagues and other hon. Members do such work.

The hon. Gentleman makes an interesting point. Not having been a smoker either, I did some preparatory research by looking at various tobacco packages in order to understand the range available. I was shocked by those that are being redesigned to appeal, frankly, to younger or to female smokers. There are different ways of designing packages, as the advertising industry has done since time immemorial, to appeal to a given audience. We should continue to make a cultural point about what it is acceptable to encourage our young people to do and not to do. That topic could be approached in several different ways, and in due course I would be delighted to hear more from the hon. Gentleman.

Stephen Williams rose—

Chloe Smith (Conservative, Norwich North)

And, indeed, from my hon. Friend, who also does great work on this matter.

Stephen Williams (Liberal Democrat, Bristol West)

I am the chairman of the all-party group on smoking and health, which has members from all parties across both Houses, and the hon. Member for Gateshead is a particularly enthusiastic member. I am pleased that the Minister has mentioned the different packaging designs—in the shape of lipstick tubes, camera phones, iPods—that are now being used by the tobacco industry to recruit a new generation of smokers. No longer are cigarettes marketed purely in the traditional rectangular boxes, with which some of us might be familiar. Does she agree that the best way forward is therefore to move to standardised and plain packs? I do not know whether anyone is involved in this, but will she deplore the recent edition of The House magazine, which we have all been sent? It is packaged and has as its cover an advertorial on behalf of the tobacco industry, but it does not disclose that that has been paid for by the industry.

Peter Bone (Conservative, Wellingborough)

Order. I really do not want to get into a debate about smoking, and I really do not think that packaging has much to do with the duty, so perhaps the Minister could continue.

Chloe Smith (Conservative, Norwich North)

Thank you, Mr Bone. I have not yet found my copy of The House magazine, but I clearly need to.

The point that unifies the sensible concerns raised by hon. Members today with the clause is the need for evidence and to continue to understand the industry. As my hon. Friend the Member for Bristol West knows, the Government are consulting on tobacco packaging, and, as I was saying to the hon. Member for Gateshead, there is much to listen to and learn from in the groups that he works with, and I am happy to receive work from them.

I want to touch on a point made by the hon. Member for Kilmarnock and Loudoun, which relates to the concept of downtrading. It is true—I have already put it on the record—that the rate adds 37p to a pack of 20 cigarettes. For those non-smokers who may not know, there are different bandings of cigarettes, but it adds that kind of money to a smoke, and some people will choose to seek out a cheaper product in the market. There is a bottom to that market and that leads on to the illicit trade, which is an important topic that the hon. Lady also raised.

Charlie Elphicke (Conservative, Dover)

I do not want to follow the route of my hon. Friend the Member for Bristol West in making a massive attack on the freedom of speech and the press in this country, but I want to note—this is in order—a key point. The level of taxation on cigarettes is particularly difficult for the least well-off. I must declare an interest as a former smoker who has recently given up. Being a Member of Parliament nowadays means that I can no longer afford to smoke, but it is much harder for those who are particularly hard-pressed and do not earn much money. Would it not be better to have greater education rather than taxation? I also note that the illicit supply of smuggled cigarettes seems to be on the rise, which is a concern and a potentially serious health hazard.

Chloe Smith (Conservative, Norwich North)

There is a grain of truth here, which is that research has consistently shown that the price of tobacco products does affect demand. It is my aim to reduce smoking through increasing duty on tobacco products, and I say that plainly. I would like to see people choose not to afford to smoke, and I would like to see young people choose not to take it up in the first place. I would like to see all the effects of reducing smoking prevalence.

Jacob Rees-Mogg (Conservative, North East Somerset)

Some people will refuse to give up smoking, and some of those people will be extremely poor and on very limited means. They will find that an increasing part of their budget is going on taxation. The measure is regressive and hits some of the poorest people in the country, so should the Government not be concerned?

Chloe Smith (Conservative, Norwich North)

My hon. Friend raises a point. People up and down the income distribution and with different profiles choose to smoke. I make no bones about that and I am not embarrassed to have to say that. This measure adds money to the price of cigarettes, and I think that that is a good thing. I would like to see less smoking.

Jacob Rees-Mogg (Conservative, North East Somerset)

Unfortunately, tobacco is addictive, and therefore some of these people who are addicted find that they have almost no choice but to smoke. Unless there are alternatives to help them quite strongly to give up, we are taxing the poorest people in society.

Chloe Smith (Conservative, Norwich North)

Perhaps I ought to pray in aid my hon. Friend the Member for Dover. I do not know whether my hon. Friend the Member for North East Somerset has taken part recently in some of the excellent NHS campaigns, but they are providing exactly what he seeks: help, through the state, for people to give up and kick their addiction. He is right that the problem of addiction underpins this debate. I do not have all the answers—I have only the tax rate—but it is clear that a broader job needs to be done across the education, business and health sectors.

Grahame Morris (Labour, Easington)

What would the cost to the Treasury be if everyone gave up their addiction to cigarettes and stopped buying them via legal means? Would it be in the order of £12 billion?

Chloe Smith (Conservative, Norwich North)

I suspect that even HMRC modelling and the most wishful of thinking would not allow that scenario to arise. As I have said, the clause will raise an additional £260 million. I am sure that the figure sought by the hon. Gentleman can be supplied to him at another time.

I want to address the issue of illicit trade, which is also relevant to the hon. Gentleman’s intervention. Whatever the product, someone will try to sell it for gain, which is as true of the market under discussion as it is of any other market. The Government are committed to tackling tobacco smuggling, which is only one element of illicit trade, but a major one at that. Tobacco fraud costs taxpayers more than £2 billion a year, depriving the general public of revenue to fund vital public services that support us all, including those to whom my hon. Friend the Member for North East Somerset has referred. Illicit tobacco undermines public health objectives and affects the health both of individuals who smoke and of wider communities.

Mark Garnier (Conservative, Wyre Forest)

I am yet another in the queue of many people who have given up smoking. On trying to affect behavioural change, in 2003 it was estimated that about £10 billion a year was lost to the Revenue through tax avoidance as a result of smuggling and so on. That has now come down, as the Economic Secretary has said, to about £2 billion. However, as taxes go up, people are pushed towards behavioural change and buy illicit tobacco from car boot sales, for example, which they would not otherwise have done. What efforts is HMRC making to tackle the illicit trade in cheap whites and so on, in order to try to recover money on behalf of taxpayers?

Chloe Smith (Conservative, Norwich North)

I certainly can provide that update—my hon. Friend may even be able to look over my shoulder and see the figures on the page in front of me. The key point is that HMRC and the UK Border Agency launched a renewed smuggling strategy in April 2011. Since the precursor to that strategy was introduced in 2000—this covers a period of 11 years—the size of the illicit cigarette market has been cut by almost half, which I am sure hon. Members will agree is a sizeable achievement. The renewed strategy has to build on that success.

Ian Mearns (Labour, Gateshead)

I have had some experience of the illicit smuggling market in my own constituency of Gateshead. There has been a significant variation in the exchange rate between the pound and the euro since 2003. Back in 2003, busloads of people used to leave the north-east to go to places such as Luxembourg, buy cigarettes—the personal allowance was 3,000 cigarettes per person—bring them back into the country and then smoke 150 packets before going on their next trip a fortnight later. The difference in the exchange rate was widely abused. The fact that European countries, by and large, increased their tobacco duties has cut down on much of that trade.

Chloe Smith (Conservative, Norwich North)

The hon. Gentleman makes a valuable point, and he highlights how HMRC must keep on its toes to stay abreast of all the latest developments in technology and products, and of what is happening in the markets in which Britain operates.

Charlie Elphicke (Conservative, Dover)

I want to touch on smuggling again. As the Minister knows, I represent Dover. Does she agree that the border officers do a fine job of stopping smuggling at our border? Does she agree that some of the £260 million that the measure raises might be invested in strengthening our border still further, so that we can clamp down even harder on smuggling and protect Exchequer revenues?

Chloe Smith (Conservative, Norwich North)

I am delighted to join my hon. Friend in praising the work of border staff. I have already noted that their work has resulted in the halving of the illicit cigarette market—a task that was set them—which is laudable. I hear his suggestion about how we should use that £260 million, and I will consider it along with other points made in the debate.

Jacob Rees-Mogg (Conservative, North East Somerset)

Following on from the point made by the hon. Member for Gateshead, will the Minister tell us whether there are any emergency plans in place in the event of a collapse of the euro? In that event, tobacco from Greece, Spain, Italy and any other countries that had left the euro would be a good deal cheaper. What might the Treasury do about that to protect its revenues?

Chloe Smith (Conservative, Norwich North)

All hon. Members—particularly my hon. Friend—well know, from having asked similar questions, that contingency plans are in place in case that should occur.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Before the Minister finishes, I would like to return to clause 185. During the Finance Bill Committee in May 2011 the then Economic Secretary justified the change that was being made by saying that she wished to target duty increases on cheaper tobacco products, because that would help to tackle down-trading from more expensive to cheaper tobacco products. Will the Minister reinforce that commitment? Will the Government look at the matter in the year ahead and perhaps introduce further changes in 2013?

Chloe Smith (Conservative, Norwich North)

I am glad that the hon. Lady has noted that point. I wanted to finish by answering one of her earlier questions about changes to structure. Hon. Members may know that tobacco taxes have two component parts. My predecessor made the changes that the hon. Lady has mentioned at Budget 2011. When the Budget 2012 decisions were taken, 12 months’ data were not yet available to me. I would like to be able to assess the impact of the Budget 2011 measures prudently before committing to further changes in the structure of cigarette duty.

The hon. Lady asked about a potential gap in HMRC data, and I can confirm that our latest data on the tobacco tax gap have not shown an increase in illicit trade. Those data are updated annually and official figures will be available in September. Some industry data show an increase, and hon. Members may draw their own conclusions about that. As I say, we will have to wait for official data to be released, because information is vital in this area.

I have said that the clause will raise an additional £260 million over five years, which will help us to reduce the deficit and to fund the vital public services that relate to the health aspects of the measure. The taxation change supports the Government’s health objectives by helping to reduce smoking. I am confident of the performance of HMRC and Border Force officials in tackling the illicit market. I end with a quote from the Action on Smoking and Health group from February of this year, the views of which were endorsed by 91 health and welfare organisations:

“Reducing affordability through increasing taxation is acknowledged to be very effective in encouraging smokers to quit and in discouraging young people, who are particularly price sensitive, from taking up smoking.”

Charlie Elphicke (Conservative, Dover)

Will my hon. Friend give way?

Chloe Smith (Conservative, Norwich North)

I was about to sit down, but of course I will give way.

Charlie Elphicke (Conservative, Dover)

My hon. Friend will know that there is a rise in the new electronic cigarettes, of which I am a beneficiary. I have noticed that many Members from both sides of the House increasingly use them. Currently, they are untaxed. Does she envisage that they will remain so for the rest of this Parliament?

Chloe Smith (Conservative, Norwich North)

My hon. Friend goes a step too far—I announce for the record that he is about to show one of said products to the Committee. I shall leave my comments there.

Clause 186 - Rates of alcoholic liquor duties

Grahame Morris (Labour, Easington)

I beg to move amendment 191, in clause 186, page 107, line 9, at end insert—

‘(3A) The Chancellor of the Exchequer shall review the wider economic impact of the duty increases imposed by subsection 3 on the beer and pub industry, and consumers, and shall lay a report of his review in the House of Commons Library.’.

Peter Bone (Conservative, Wellingborough)

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

Grahame Morris (Labour, Easington)

I am grateful to have the opportunity to raise a subject that is dear to my heart. The clause increases the rate of excise duty charged on spirits, beers, wines and other alcoholic beverages. I am sure that hon. Members from both sides of the Committee, and Officers and Clerks, will be enjoying some alcoholic beverages in an activity that has become popular, which is known as chillaxing—I think the Prime Minister is fond of that phrase. Perhaps they will be doing so while watching the Euro 2012 football and, I hope, celebrating success for England this evening.

I declare an interest not only as someone who obviously loves beer—hon. Members can tell that from my shape—but as vice-chair of the all-party save the pub group. I am also a member of the working men’s club and institute union, the CIU, and of various working men’s clubs, including the Murton Victoria club; Easington colliery working men’s club; Peterlee Labour club, hon. Members will not be surprised to hear; and Deneside working men’s club in Seaham. [Interruption.] Hon. Members opposite are probably members of very exclusive London clubs, but the clubs that I have listed are very inclusive establishments.

The amendment tabled by my hon. Friend the Member for Livingston requires a review of the impact of the proposed duty increases. The clause’s effect is to substitute new rates of excise duty in the Alcoholic Liquor Duties Act 1979, ALDA, which is not to be confused with Aldi, the discount supermarket. I certainly do not want to get into a debate about minimum price on alcohol, which is a separate issue, but it is relevant to a couple of points that I shall make shortly.

The previous excise duty rate on spirits of £25.52 was replaced by the new rate of £26.81 from March of this year, and the previous beer duty rate increased from £18.57 to £19.51. For the Committee’s information, perhaps the Minister can equate those figures to a price increase per pint or bottle of alcoholic spirits. Unless hon. Members are like the Olympic flame and never go out, it cannot have escaped their notice that the pub industry has been one of the hardest hit sectors during this economic downturn. Across the country, pubs are closing their doors for the last time, which has a considerable social and economic impact on villages, towns and cities. It looks like it is becoming irreversible.

Since the beer duty escalator was introduced in 2008, a range of new and demanding costs have also been applied across the industry. I have received a briefing from the British Beer and Pub Association and I have had discussions with it through the all-party group. It has pointed out to me that inflation has risen, VAT has increased, brewing costs have risen and incomes have fallen right across the sector. There has also been the impact of the fuel duty increases, which have impacted on delivery costs.

As we all know from our constituencies, pubs are a vital part of our social life and are a social boon. No matter what sort of areas we represent—whether it is Labour, Tory or Lib Dem, north or south, countryside or urban, wealthy or poor—our public houses are the hubs of those communities. Just as important, pubs and brewing are vital to the UK economy. It is a little known fact that more than 1 million jobs depend on this sector. Again, according to the British Beer and Pub Association, beer duty has increased by 42% since 2008, while household incomes have fallen, making a pint in the pub increasingly unaffordable for many.

I know from my constituency of Easington that pubs are struggling in these tighter economic times. I understand that 16 pubs a month are closing across the north-east. Clubs are struggling, too. Many places have closed, never to reopen. That all contributes to the changing habits of people across Britain, with more alcohol being consumed in the home. Some may judge that to be a good thing. I make no moral judgment about it, but this is a fact: the change in excise duty is having an impact on the whole sector, on unemployment and on Treasury revenue. More alcohol is being consumed in the home, with cut-price loss-leaders filling the shelves of our supermarkets.

Can the Minister confirm that over the course of this Parliament the Government are planning to increase beer tax by a further 27%? Treasury forecasts show that there will be no additional revenue generated from those tax increases over the next two years. Government Members have referred to the Laffer curve of diminishing returns, and it certainly applies here. I understand that Professor Laffer is giving a lecture in the building this week.

The time is right for a pro-active strategy—not just to help those pubs that are struggling now but to boost growth in the pub and brewing industry. The previous Government went as far as appointing a Minister with responsibility for pubs, my right hon. Friend the Member for Wentworth and Dearne (John Healey), and I hope that this Government will go even further.

There is a real potential to create vital jobs and build on a great UK manufacturing success story. Our British beer is famous around the world, and our pub culture is envied by many countries. There is also the multiplier effect. One job in brewing supports one job in agriculture, one job in retail, one job in the beer supply chain and 18 jobs in pubs and clubs. Freezing beer duty in the 2013 Budget would save more than 5,000 jobs, mainly in pubs and clubs, and 16,000 over the next three years. That surely supports the Government’s growth agenda. In the Finance Bill 2012, the Government have committed to continuing the beer duty escalator, resulting in a 5% rise in beer duty in 2012-13. The turnover of the beer and pub sector is £28 billion, and the sector makes a massive contribution to the Treasury already. Sales in pubs have fallen sharply, so why, just at a time when demand is being driven down and sales are falling, are the Government once again clobbering pubs and brewers with higher and higher taxes? Last year alone, it resulted in the loss of over 5,000 jobs and hundreds of pub closures.

I am also concerned about the wider economic and social impact of beer tax, which needs to be taken into account when policy is developed. The amendment is not revolutionary; it is a request for a review of the wider economic impact of the escalator on the beer and pub sector before any decision is made to continue the policy in the 2013 Budget.

Peter Bone (Conservative, Wellingborough)

I remind Committee members that there are no time limits on speeches in this Committee.

Graeme Morrice (Labour, Livingston)

I shall just read the Whip’s note.

It is a pleasure to follow my good friend and colleague, my hon. Friend the Member for Easington. I, too, like a wee bevvie, as we say in Scotland.

The amendment was tabled as a result of increasing public concern regarding the impact of alcohol duty on the price of beer and the pub industry. The British Beer and Pub Association has highlighted the fact that beer duty has increased by 42% since the beer duty escalator was introduced in 2008. It is worth noting that, when the escalator was introduced, it was against a backdrop of rising household incomes and lower inflation and VAT. Since 2008, household incomes have been falling while inflation and VAT have both risen, leading to an increase in brewing costs. As a consequence, the humble pint of beer—a staple pleasure for millions, including, I am sure, many Committee members—is fast becoming an expensive luxury. The BBPA states that UK consumers now pay 40% of EU beer tax, while consuming only 13% of the beer. That figure is astonishing.

On the industry side, brewers pay half their brewing turnover in tax, which is crippling one of Britain’s great manufacturing industries and putting thousands of jobs at risk. The BBPA has also said that, based on current Government plans, that will increase by 27% during this Parliament, despite Treasury forecasts showing that no additional revenue will be generated over the next couple of years.

Changed circumstances mean that the impact of the beer duty escalator on consumers and the industry has been far greater than originally anticipated and a careful re-examination of the policy is required. Local community pubs, and consumers who enjoy visiting them, are paying the price.

Research conducted by the Campaign for Real Ale shows that 84% of people believe that a pub is as essential to community life as a shop or post office. I have always held the view that well-managed pubs play an invaluable role in local communities, especially in rural areas, where they are often one of the only venues available for people to gather socially. They can provide a safe, sociable environment in which people can enjoy a drink responsibly and socialise with people of different ages and backgrounds.

CAMRA states that the UK already has the second highest duty on beer in the EU and suggests that that is causing untold damage to local pubs. In just six years, there has been a 30% collapse in the volume of beer sold in pubs, as more than 7,000 pubs have closed for ever. Most Committee members will be aware of community pubs that have gone to the wall, costing jobs and leading to the loss of an important hub for community activity and socialising. CAMRA fears that this worrying trend will continue, putting many more traditional beers and pubs under threat, and is calling for an end to the beer duty escalator and a long-term freeze on beer duty. Some 58,000 people have already signed an e-petition calling for the escalator to be scrapped in next year’s Budget, making it almost certain that it will reach 100,000 signatures in the near future and allow campaigners to seek a parliamentary debate.

Given the importance of the beer and pub sector to the economy, with a £28 billion turnover and around a million jobs supported, it is vital that the wider economic and social impact of the beer duty escalator is fully considered when decisions are reached. This amendment would help to inform the debate, by ensuring a full review of the wider economic impact.

Ian Mearns (Labour, Gateshead)

I am pleased to update my hon. Friend. I attended the Backbench Business Committee earlier this afternoon and the number of people who have now signed the petition comes to 57,893, so it is going up rapidly. We ignore the social service that often occurs within public houses in our constituencies at our peril. I know many public houses in my constituency and the wider Tyneside area that provide cheap food at lunchtimes, particularly for pensioners and those receiving benefits. They provide that social service, which we ignore. If we undermine the capacity of pubs to carry on doing this, we will all see a social cost.

Graeme Morrice (Labour, Livingston)

I am grateful to my hon. Friend the Member for Gateshead for bringing me up to speed on the current figures for the petition. I agree with his comments. He helps me make my argument. The amendment would help to inform the debate on the subject by ensuring a full review of the wider economic impact of the escalator on the beer and pub industry in advance of further decisions in the 2013 Budget. It is a considered response to a damaging and deteriorating situation, which is not only putting at risk jobs and investment in the beer and pub sector, but also making one of life’s simple pleasures—a pint in a local pub—increasingly unaffordable for many hard-working people.

Robert Syms (Conservative, Poole)

I will make a brief contribution. The hon. Member for Livingston makes a good point. The brewing industry employs a lot of people and is very important. It has a lot of regional roots and we should be extremely careful how we treat it, because—going back to our dear old friends, imports—we know that people import a lot of beer which does not attract the same rate of duty. I will make one point to cheer up hon. Members opposite. When you have inflation at over 5% because of the VAT rise, petrol prices and everything else, anything on top of that will mean quite high price rises. That is why the news today that inflation measured by the consumer prices index and retail prices index has fallen will tend to mean that 2013, 2014 and 2015 are likely to be less painful, and therefore less painful for the brewing industry.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friends and the hon. Gentleman for making those contributions. Hon. Friends have set out a powerful case exploring both the issues around the taxation regime and the social value provided by pubs and clubs in many areas and the contribution that they play to keeping community cohesion. I also know from my constituency and other parts of rural Scotland how difficult it is for some of those pubs that have been there for many years to continue to make enough to keep them going. In many instances, they are looking to diversify and they are looking to Government and local authorities and others to assist in allowing them to do so.

I do not want to repeat all the points raised by my hon. Friends. I will confine my contribution to asking the Minister some questions. I will resist the temptation to pick up the point raised by my hon. Friend about UK consumers footing 40% of the EU beer tax bill, yet consuming only 13% of the beer. I am not sure how much beer is going to be consumed later this evening. Hopefully, some of that revenue will accrue to the Exchequer and make the Minister happy, even if the overall result of the match does not turn out as people wish. [Hon. Members: “Oh!”] I can see that I am not making friends on either side here, which is not unusual for a Kilmarnock football club supporter.

On a serious note—[Interruption.] I am afraid that I did not have the benefit of hearing that aside, but perhaps it is better that I did not. Will the Minister respond to questions that have been raised by the industry, particularly in relation to encouraging the responsible consumption of low-strength alcohol? Does she have plans to examine how the beer duty escalator influences that? Will she look to the future, using the opportunity proposed by the amendments, and ensure that the matter is revisited, perhaps in light of next year’s Budget, even if she has not been able to do so this time around?

Julie Hilling (Labour, Bolton West)

I want to strengthen the point that my hon. Friend makes, in terms of people turning to beverages that have a higher alcohol content, which as we know, has a severe, detrimental effect on people’s health. We are seeing an increasing number of young people with liver disease and other illnesses that are caused by high-level alcohol consumption. We would surely be better focusing any tax increases on drinks with a higher volume of alcohol, rather than on those with a lower volume. It seems absolutely topsy-turvy to be putting a huge increase on beer, rather than on the drinks that cause the most harm in society, not only in terms of health but in terms of anti-social behaviour.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Mr Bone, I suspect that you do not want me to go off on too much of a tangent and discuss some of the wider issues. We could stray into very difficult territory, in terms of moving to minimum pricing, what form that would take, and how to deal with anti-social behaviour, which the hon. Lady mentioned. She has made a very important point, however. If we are to try and ensure that related health issues are dealt with, we must encourage responsible drinking. Any way in which that can be done—for example, by considering low-strength beers—would be helpful, as I am sure the Minister would agree.

My specific questions relate to the ongoing debate about duty marks on beer. As the Minister is well aware, there are different views and opinions on that issue. The Federation of Wholesale Distributors has made submissions in favour of duty marks. It believes that there would be a number of benefits, because the marks would be a simple and easily identifiable way for HMRC to identify whether the duty on beer has been correctly paid, and it would provide reassurance to businesses and customers that they were selling or buying legitimate products. The federation believes that it would be a cost-effective way of tackling alcohol fraud, with the process perhaps requiring less bureaucracy than product tracking.

On the other hand, the brewing industry—the beer industry in particular—is very concerned about the proposal, and it believes that the proposal has been lifted from measures that were made in relation to the tobacco strategy. The industry feels that counterfeiting and fraud is more prevalent there, and therefore, the proportionality of applying something like a duty mark or stamp would not be helpful, and would cause problems for the industry.

Will the Minister comment on those points, and provide some indication of how she intends to continue that debate with the industry, as well as stating when further measures on that matter will be introduced for us to consider?

Chloe Smith (Conservative, Norwich North)

Mr Bone, I regret that I did not say at the outset that it continues to be a pleasure to serve under your chairmanship, as we draw to the final period of today’s sitting. On one of your rulings earlier, I do not know whether you wanted to see the downfall of the Whip or the downing of a pint as you get us quicker to the end of today’s sitting and closer to the football.

My role today is to say what the clause does. It increases the duty rate charged on beer, cider, wine and spirits by 2% above inflation with effect from 26 March this year. Together with VAT, the pre-announced increases from the previous Government are equivalent to 3p on the price of a pint of beer; 2p on a litre of cider; 11p on a bottle of wine; and 41p on a bottle of spirits.

Ian Swales (Liberal Democrat, Redcar)

Opposition Members rightly pointed out that according to the Red Book, the measures have no net impact. Does the Minister agree that what she is proposing means that the industry declines by the percentages that she is reading out, because if it did not there would be a net impact of extra taxation?

Chloe Smith (Conservative, Norwich North)

Of course I do not agree with that suggestion. The measure was included in Budget 2012 for a number of extremely good reasons. We certainly do not want to see the death of the industry. I shall continue with my remarks and deal with that and other points that have been made.

I, too, am a big supporter of the local pub. I run “politics in the pub” surgeries in my constituency. [Interruption.] Indeed, I am told that the thing to do in such debates is to name your local paper. I must laud the Norwich Evening News for its “Love your Local” campaign, in which I have played an active part for the past few years and which I think is very effective in highlighting how good pubs can do good trade in a very good city.

I shall provide the Committee with some background to the clause, which implements the pre-announced, above-inflation increases that were first announced at Budget 2008 by the previous Government, and which were extended in the March 2010 Budget. The additional revenue from the increases was included in the public finance projections at that time. I might suggest to one of the “Morrises”, if I may call them that—

Grahame Morris (Labour, Easington)

We are both called Grahame.

Chloe Smith (Conservative, Norwich North)

I will more politely answer the hon. Member for Easington, who is one of the two who has tabled amendments. He asked what the numbers add up to over five years. For one thing, he will be aware that the increases depend on the level of inflation. Secondly, he will of course wish to ask his own Front Bench team what they were doing in 2008 and 2010 to get those figures. As I said, the revenue from the increases was included in the public finance projections at that time, hence my suggestion about where he should direct that question.

Hon. Members will be aware that sticking with revenue plans as set out is vital for the economy. As the previous Government had already accounted for the revenue before it had been received, cancelling the increase would mean that we would have to raise other taxes to stay in the same position. I humbly suggest to the Committee that leaving a hole in the public finances would help nobody—not landlords, not pub drinkers nor anybody else in the UK economy—so we have decided to go no further than the policy we inherited from our predecessors and we have sought to safeguard revenue.

Ian Swales (Liberal Democrat, Redcar)

I want to apologise to the Minister and correct the record. I misread the Red Book. As she rightly points out, this policy is a policy of the previous Government. It is shown in the part on measures that were already in place when this Government came to power.

Chloe Smith (Conservative, Norwich North)

I thank my hon. Friend for that clarification. I will go a little further into the amendment tabled by the hon. Members for Livingston and for Easington. It is a genuine delight to see them acting in unison, as they have when the Committee has divided. The amendment proposes that the Chancellor review the wider economic impact of the duty increases on the beer and pub industry and consumers.

It is good to see Opposition Back Benchers following their Front Bench and, rather than necessarily proposing a change of substance, requesting a report. I recognise the important contribution that pubs make to local communities and the wider economy. In November 2010, we published an extensive review of alcohol taxation in which we spoke to the relevant industry groups. I was not the Minister at the time but my predecessor did that. The British Beer and Pub Association and the Campaign for Real Ale welcomed the review. We continue to keep all the taxes under review and regularly monitor the impact of alcohol duty rates on industry and consumers.

The hon. Member for Easington asked whether duty take would fall over the period in question. Forecasts show that implementing the preannounced increase will increase duty receipts. That is true for all alcohol types. At that point I would refer to the argument that I made at the outset. Nobody raises revenue for fun. The Government use revenue to fund vital public services, which is something that Members might consider when they hear that duty receipts are to rise.

Let me return to something else that CAMRA has brought to the fore. CAMRA figures show that the net rate of pub closures has slowed dramatically over the past two years, which is very positive. I have already said a little about what I try to do in my constituency to support pubs. I am sure that we all seek to support pubs in our areas, but let us discuss what the Government are already doing. We support pubs as places where people can drink sensibly in a responsible way and enjoy themselves and the company of others.

Grahame Morris (Labour, Easington)

It is where you leave the kids.

Chloe Smith (Conservative, Norwich North)

I think I may need to get my hearing tested. I have the benefit of not having heard that remark.

We want to reverse the trend towards pre-loading, as it is called, on cheap alcohol at home. As hon. Members will be aware, the recent alcohol strategy highlighted plans for a minimum unit price. Without going into that in too great detail because it is not part of the clause, it is important to note that it will help to tackle the issue of excessive alcohol consumption and heavily discounted alcohol sold in supermarkets and off-licences. This measure will not only reduce alcohol consumption and curb pre-loading before a night out but should help to reduce the demand for cheap alcohol on the off-trade side, then help the on-trade by extension.

Let me also refer to what has been done to support low-strength British products, as beer is called. As hon. Members will know, beer is currently taxed in proportion to its strength, so lower-strength beers pay less tax. One of the decisions the Government made in October 2011 was to reduce taxation on beer by 50% for beers at or below 2.8% ABV. Indeed, CAMRA welcomed that measure and said that reduced tax on low-strength beers was good news for pub goers. I certainly agree with that.

We are consulting on legislative measures to tackle alcohol duty fraud. The hon. Member for Kilmarnock and Loudoun mentioned fiscal marks. I would be happy to have a longer conversation after the Committee has risen about that. Alcohol duty fraud results in tax losses of up to £1.2 billion a year and undermines the legitimate industry, resulting in lost sales, jobs and growth prospects. Hon. Members have sought to raise the problem of illicit trade in the context of a number of different clauses, and HMRC will work on that issue in relation to alcohol as much as for any other product. I will happily return to the issue if hon. Members wish to discuss it at a later date.

Let me reiterate: the changes proposed by clause 186 add what I will say is “only” 3p to a pint of average strength beer. That includes VAT, and let me put on the record the fact that the total duty on a pint of beer is 47p. I think that hon. Members will agree that 3p is not an unreasonable amount, especially as alcohol consumption comes with its own costs—again, we return in part to discussions that we have already had about how the provisions in the Bill will impact on wider society in relation to health and perhaps crime.

Let me return to the issue of what is paid by the customer inside the pub, and whether or not that could be damaging to the economy. Alcohol duty is only one of a wide range of factors that determine the final price paid by the customer, and it is clear that many factors have influenced the trend of pub industry decline. Beer consumption itself has been in a period of decline; lifestyles are changing and individuals have increased choices not only between different types of drink but in their leisure activities and where they are conducted. Consumer tastes change, as do economic times, and the amendment looks narrowly at the impact of an increase in duty. The wider context should be considered. For example, pubs that serve food often do better than those that do not, but that is not linked to the level of duty. As I said about my own constituency, good pubs do good trade, and that is relevant to what is proposed by the amendment.

As I pointed out, we published a review of alcohol taxation a year and a half ago, and although I welcome the chance to discuss the issues raised in the amendments, I do not think that there is a case for asking the Government to produce a formal review on the subject. I therefore urge the hon. Member for Easington to withdraw the amendment. In conclusion, the clause implements pre-announced increases in alcohol duty made by the previous Government. It also plays an important role in reducing what I might describe as the last Government’s debt.

Grahame Morris (Labour, Easington)

In view of the assurances that we have heard, and under the circumstances, I beg to ask leave to withdraw the amendment.

Clause 187 - Repeal of drawback on British compounds and spirits of wine

Jacob Rees-Mogg (Conservative, North East Somerset)

I am sorry to trouble members of the Committee with this matter because I know that they are keen to prepare themselves for the debate on financial services market abuse later this evening. However, this clause deals with a concerning change in the regulations, and I wish to bring people’s attention to the explanatory notes which state that

“it is doubtful whether section 22 is fully compliant with EU directive 2008/118, which concerns the general arrangements for excise duty.”

I am surprised that the hon. Member for Bassetlaw did not point that out.

I am concerned, first, that we are introducing a piece of legislation primarily because of the European Union, which is something of which we should always be suspicious, particularly in taxation, which is reserved to this country. Although this measure concerns tax not being paid or being rebated at a particular stage in the process, it is still fundamentally a taxation issue.

Secondly, the clause might discriminate against smaller businesses. If a producer of alcohol stores their alcohol on site, they do not have to pay duty until it moves from their premises. For a small operator who warehouses alcohol, should the repeal be implemented, duty will become payable at the point at which the alcohol is moved to the warehouse. That will have unfortunate cash-flow implications for small businesses at a time when they are particularly hard pressed. I am deeply concerned that we are slightly rushing through what appears to be a tidying-up exercise, by getting rid of a minor section of a 1979 Act, pretty much the last Act passed by the Callaghan Government before it collapsed. It is a minor section of an old Act that could have an effect on businesses in this country. When it is very difficult to get bank credit, as we discussed earlier, requiring the payment of duty before the goods are finally shipped on to the end retailer could be very damaging for businesses. I hope the Government will think again or explain why the clause does not have the effects that concern me.

Chloe Smith (Conservative, Norwich North)

I certainly shall endeavour to answer those points. I think I can offer my hon. Friend sufficient reassurance. Clause 187 makes changes to repeal section 22 of the Alcoholic Liquor Duties Act 1979, or ALDA—as has been made clear to the Committee, with thanks to the hon. Member for Easington—with effect from Royal Assent.

ALDA section 22 provides for the drawback—in other words, repayment—of excise duty on spirits manufactured by licensed rectifiers and compounders that are exported from a producer’s premises or placed in a warehouse for approved purposes. For example, that would be for use as stores onboard ship or for any permitted operation in a warehouse.

The section is being repealed because it is redundant. Rectifiers and compounders no longer regularly claim drawback. That is due to changes in business practices, including an increase in the use of duty suspended spirits, removing the need for duty repayment. I can reassure my hon. Friend that this measure will not pose problems to industry. HMRC consulted all licensed rectifiers and compounders, as well as the Gin and Vodka Association—we never knew it existed—and the Wine and Spirits Trade Association, on its proposals in October 2010, and no objections were raised. I hope that my mention of October 2010 reassures hon. Members that the measure is not being rushed through. Time has been given to its consideration.

Producers and exporters wishing to claim drawback on direct exports of rectified and compounded spirits may do so using the existing provisions of the Excise Goods Drawback Regulations 1995, which I will abbreviate to EGDR. It is the case, again to reassure my hon. Friend, that there is an alternative means by which the end, from the Minister’s point of view, can be achieved.

Jacob Rees-Mogg (Conservative, North East Somerset)

I accept that for export it is not a problem. It is merely a problem for people who warehouse off-site and move to a third-party warehouse, which will then impose an extra cash-flow cost.

Chloe Smith (Conservative, Norwich North)

I thank my hon. Friend. Let me make a little more progress and I suspect I will be able to deal with his concern. I will define and clarify for the Committee what is meant by rectifiers and compounders, and turn from there to those who might warehouse products.

HMRC conducted a review of the regime for rectifiers and compounders. A rectifier is someone who is licensed by HMRC to re-distil spirits, for example, in the manufacture of UK-produced neutral spirit. A compounder is someone who is licensed by HMRC to combine or mix plain spirits with any other substance, so as to alter distinctly the character or flavour of the original spirits, for example in the manufacture of UK-produced gin.

HMRC’s review established that ALDA section 22 was no longer being used by businesses, so was ripe for repeal. I regret I cannot say whether those businesses split their responses according to warehousing duties and activities, and other activities, but I would be happy to speak to my hon. Friend after the Committee has risen and provide a little more information, if I do not manage to answer his points.

Changes made by the clause will remove ALDA section 22 from the statute book. Rectifiers and compounders will be unaffected by the repeal, because they no longer use ALDA section 22. They have told us that, and we in HMRC feel that we can go ahead. They will not have to change their procedures as a result of the measure. The consultation I referred to was, I think, broad enough, although since it took place in October 2010, I was not the Minister involved. I am very happy to go back and see what I can find further to reassure my hon. Friend. Those who wish to claim drawback will be able to use the EGDR, as I set out. That follows the procedure set out in HMRC Notice 207 in relation to excise duty and drawback. That change has been accepted by industry and will have no effect, as I said, on the practices of rectifiers and compounders.

HMRC will, however, carry out a review of the associated secondary legislation, the Spirits Rectifying, Compounding and Drawback Regulations 1988—fascinating as I am sure they are—in the next 12 months. Those regulations set out specific requirements placed on rectifiers and compounders. The review will identify any changes necessary to the regulations, particularly as a result of the repeal of ALDA section 22.

In conclusion, if I have been able to reassure my hon. Friend sufficiently, this measure supports the Government’s objective of simplifying the tax system by removing redundant legislation from the statute book. I am hopeful that the full consultation undertaken by HMRC means that this piece of legislation was no longer used by businesses. No objections were raised to its repeal.

Clause 190 - Machine games duty

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Amendment 193, in schedule 24, page 542, line 11, leave out ‘20%’ and insert ‘15%’.

Amendment 192, in schedule 24, page 542, line 34, at end insert—

Graeme Morrice (Labour, Livingston)

Members will be aware of the industry concerns which have been raised about the potential impact of the machine games duty. Industry representatives have highlighted various flaws in the Government’s proposals. They believe it will result in an increased tax burden on small businesses in the amusement sector, which has already been struggling in recent years, with the closure of more than 280 arcades over the last 18 months.

The introduction of the MGD, at a rate which is too high to be sustainable, will also impact on bingo halls, pubs and clubs across the country. Bingo is one of the most popular pastimes in the UK, with 3 million people making around 48 million visits to bingo clubs in 2010. The role of bingo clubs in local communities is well recognised, and I know many of my constituents really look forward to their regular game of bingo, partly for the chance to earn a few pounds, but mostly for the opportunity it provides to socialise with friends. Often, this is the only opportunity some older constituents have each week.

Industry representatives have highlighted that 180 bingo clubs closed between 2005 and 2010, and that if the MGD is set at a rate above 20%, it could lead to a further 100 or more clubs closing, with a loss of over 2,500 jobs.

These amendments set out a solution by allowing businesses to net off irrecoverable VAT against MGD, and ensuring that MGD rates are set at a realistic level. The amusement industry sector believes that the current structure of two rates will not achieve the objectives sought by the Treasury. In particular, it highlights the vastly different business models that exist for small businesses in the amusement sector, which means the impact of irrecoverable VAT will vary from business to business.

The bottom line appears to be that an industry built on small businesses, many in seaside locations, is in a perilous state and needs a little extra help to get through this difficult period and sustain important jobs in rural areas in the process. I will be interested to hear the Minister’s response to the proposal.

Sheila Gilmore (Labour, Edinburgh East)

My hon. Friend referred to rural areas, but he might be surprised to learn that I have a seaside in my urban constituency. Like many other places, it has suffered in recent years and is suffering now, perhaps because of people’s desire to go elsewhere for the sun. Does he agree that that kind of imposition on small businesses is serious and will make it more difficult for such areas to flourish?

Graeme Morrice (Labour, Livingston)

I certainly agree with my hon. Friend, whose constituency of Edinburgh East contains that lovely seaside resort of Portobello, which I have visited on many occasions going back many decades.

To crack on, the second amendment that we have tabled is important because the rate of machine games duty is critical. Representatives of the bingo and amusement arcade industries are united in the belief that MGD at 20% would be unfair and would damage businesses. Members will be aware of research conducted by Ernst and Young that shows an annual burden of more than £9 million in the current tax regime for bingo if MGD is introduced at 20%.

The Bingo Association has highlighted that that would result in more club closures and further job losses, as well as a far wider impact on machine supply and servicing firms, building contractors, food and drinks suppliers and other businesses connected with bingo. The rate can always be looked at again in future years, but starting at a more cautious one of 15% would lessen the risk of more businesses being damaged, while having a negligible impact on duty revenues. Setting the standard rate of MGD at 15% would minimise the harmful impact on the industries affected and enable them to grow and increase the tax take. I very much hope that the Government will listen to the genuine concerns expressed by those representing thousands of small businesses in the bingo and amusement sectors and accept this proposed change to the MGD rate.

Ian Swales (Liberal Democrat, Redcar)

My constituency of Redcar has the sort of establishments that every constituency has—bookmakers, pubs, clubs and so on—but it has a thriving working men’s club sector of the type referred to by the hon. Gentleman. It also has a race course that depends on a healthy bookmaking industry, and a seaside with amusement arcades. This area of legislation is therefore important to my constituency.

I have absolutely no problem with the objectives of the proposed legislation, including simplification, although, having looked at the 27 pages of schedule 24, it does not seem that simple to me.

Grahame Morris (Labour, Easington)

The hon. Gentleman is saying that he has no problem with the legislation, but although the justification of the proposal is simplification, and it is tax neutral, a detailed study carried out by Ernst and Young indicates that the tax take will in fact be bigger, which will have a negative impact on the small businesses in his area that he has just been praising.

Ian Swales (Liberal Democrat, Redcar)

I am coming on to the points made by the hon. Gentleman, because I was about to say that one of the proposal’s objectives is to be revenue neutral. We want to see that that is based on evidence, consultation and correct assumptions. I know that the Minister is aware of the representations, some of which have already been referred to, and I want to highlight the input into the exercise made by the Association of British Bookmakers. Licensed betting offices account for 48% of the machine games duty tax take. We have had analysis from Ernst and Young, and I have seen some detailed private analysis. Despite all the different premises, businesses and categories, I have not yet seen a single one that shows a rate of 20%, so the average rate is clearly lower than 20% right now.

Bookmakers are already taxed from nine different sources and have an overall tax bill far higher than their profits. Any increase, which, again, they believe the legislation will lead to, threatens jobs and shops. The big five bookmakers categorise their shops by size, and they categorise 1,350 as very small. They believe that many of those shops will be under threat. There are also bookmakers outside the big five, including independent operators and even single-shop operators, that account for another 1,250 shops that might be under threat.

The Treasury has admitted a degree of uncertainty in the calculation, and the Chancellor’s reply to the chief executive of the ABB stated that

“the Government is considering what further data can be published.”

I urge the Minister to publish further data so that the industry can understand the thinking behind the measure, and check and challenge the numbers. As I have said previously, I have no wish to change the policy’s objectives, but it is important that the Minister check that the objectives will be achieved and, in particular, are revenue neutral.

Grahame Morris (Labour, Easington)

It is a real pleasure to follow my hon. Friend the Member for Livingston and to pick up on the points raised by the hon. Member for Redcar. I have also read the brief from the ABB, and I want to highlight two issues: the impact on betting shops and the impact on bingo halls.

There are 17 betting shops in my constituency, and they employ 85 people directly and support a further 119 jobs. Those shops pay some £187,000 in business rates. As was indicated a little earlier, the betting industry predicts that 11,000 jobs and 2,600 shops will be lost as a direct consequence of the 20% machine games duty rate, because more than 2,600 shops make less than £22,000 in profits each year. That is a large proportion, almost a third, of the total number of shops.

Today’s betting shops are, in the main, modern leisure and retail businesses. However, one of the things that has characterised this debate—this is true of Opposition as well as Government Members—is the view that betting shops and gambling have a bad name. There is a perception of bookies in large cities being the same as bookies in an area such as mine, where staff and customers are well acquainted and friendly, and where there tends to be less passing trade. Betting shops are an important part of the retail mix in the high street, especially in areas such as mine. Apart from post offices and pharmacies, they generate more footfall than all other similar sized businesses.

The Mary Portas report, which has had a lot of publicity recently, recommended that empty units be used as bingo halls. In Easington, we have a problem with the high level of vacant and derelict shops. Betting offices could fill some of those premises and keep a modest number of people coming to often quiet high street areas.

John Mann (Labour, Bassetlaw)

Has my hon. Friend noted, as I have, that a theme of the Budget—from bingo and bookies to pasties and caravans—is taxing the pleasures in which the Prime Minister and, particularly, the Chancellor never partake.

Grahame Morris (Labour, Easington)

That is an interesting point very well made. I had not given it any thought, but my hon. Friend is probably correct.

In the few minutes I have left, I want to make some points about the amusement industry and bingo halls. Like other sectors in this country, the amusement industry is facing a critical period in these tough economic times. More than 280 arcades have closed in the past 18 months, which has had an impact on the manufacturing sector. Companies that manufacture amusement machines have seen their sales drop by 55% in five years. Bingo halls and pubs and clubs up and down the country have also been affected. I appreciate and value these businesses, especially in communities such as mine. Bingo halls are a lifeline to many older people, as indeed are local pubs and clubs. They are often at the heart of the communities they serve. The Budget proposals are likely to cause further closures. As well as the knock-on effect of job losses and falling tax revenues, the Bill contains plans to reform the taxation of gaming machines through the introduction of a machine gaming duty.

As has been said, although the Treasury claims in the explanatory notes that its aim is to simplify the tax system in this area and that the changes are revenue-neutral, such assertions are strongly challenged by industry representatives. Will the Minister comment on that? If it is not the Government’s intention to increase the tax burden on small businesses but simply to reform the tax system, why is the burden being increased? Ernst and Young has cast real doubt on the claim that these measures are revenue-neutral. It says that they are likely to increase the tax burden on small businesses and introduce additional complexity and compliance burdens. Government Members often claim to be the champions in the war on red tape and bureaucracy, but that is exactly the issue we will now have to face.

Ian Swales (Liberal Democrat, Redcar)

When the Government have been challenged on these issues, one of the expressions that has come back is that there may be winners and losers. The hon. Gentleman has obviously researched the matter extensively. Is he aware of who the winners are?

Grahame Morris (Labour, Easington)

That is an interesting question. If the industry is right and the surveys are correct, the Treasury stands to gain from these measures, at least in the short term. However, it is a pyrrhic victory if the consequence is that more jobs are lost. Although 180 bingo clubs have closed since 2005, with the loss of 2,500 jobs, we still have a significant industry in many areas of the country, which generates more than £300 million a year in tax revenues for the Treasury.

I am pleased to say that Easington has a number of bingo clubs, which I have visited. Like other Members, I have taken the opportunity to play bingo with local residents. For many people, especially the elderly, bingo is their sole social outing, so it is a vital lifeline. Bingo fulfils a basic social function for vulnerable people and is important in communities such as mine.

Gala Bingo has sent me a brief. It says that the

“break-even rate of machines taxation for bingo is 16.3%”,

which is much closer to the 15% that our amendment proposes, rather than the 20% that the Treasury is proposing. The danger for many clubs is that the increased tax burden will make them unprofitable. Although the figures may look small and the overall impact on company profits may be low in percentage terms, the real risk is that more remote clubs, such as those in my area, will be forced to close.

Ian Mearns (Labour, Gateshead)

Like my hon. Friend, I have a number of pubs, clubs and bookmakers in my constituency that rely on revenue from gaming machines. Unfortunately, due to the local economy many of those establishments are teetering on the brink. The trade in the area tells me that this relatively modest change—from the Government’s perspective—will drive some establishments over the brink and into closure. Sadly, it is unlikely that they would ever return from that position.

Grahame Morris (Labour, Easington)

I am grateful to my hon. Friend. With bookmakers, it is particularly the small independents who are most vulnerable. Machine gaming duty should be set at 15%. Any tax rise above 15% will cause club closures and job losses.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friends. My hon. Friend the Member for Easington and the hon. Member for Redcar have given powerful speeches explaining why the Government should think again. I will reiterate some of the most important points and seek assurances from the Minister.

As my hon. Friends said, we have received representations from the amusement arcade industry and the bingo sector, as I am sure has the Minister. They tell us that they are facing difficult times at the moment. More than 280 arcades have closed. As my hon. Friend the Member for Edinburgh East suggested, the seaside economy is in difficulty at the moment and we want to ensure that people who have made their living in traditional ways can continue to do so.

As my hon. Friend the Member for Easington said, the people bingo halls and clubs serve have changed over the years. They are no longer exclusively the province of women, although traditionally they served much the same purpose as a social hub for women, as the pub did for men in some working-class communities. They were a place where women could meet people and have a social evening, as well as hope to win something more than they could get from their jobs or other income.

The real question I want to press the Minister on is that, as has been mentioned, the Treasury’s justification for the reform appears to be that it will simplify the tax system and remain revenue-neutral. Evidence and submissions, which I believe the Minister has been given, suggest that that is unlikely to be the case. The Ernst and Young report, to which my hon. Friend referred, suggests that the changes make it unlikely that the Treasury will achieve its aim of a neutral change. It believes that the proposed structural tax change will introduce additional complexity and compliance burdens to businesses, particularly in seaside constituencies, and are likely to cause the further closure of businesses, potential reduction in investment, loss of jobs and the loss of tax revenue for the Treasury.

As others have mentioned, submissions from the bingo industry particularly highlight that the fiscal-neutral rate for the sector is 16.3%. Bingo industry modelling shows that an MGD rate of 18% would cost each bingo club about £11,000, a 20% rate would cost about £26,000 per club, and a 22% rate would cost about £41,000 per club. It also points out that about 170 bingo clubs make less than £70,000 a year. It estimates that an MGD rate of 22% would therefore lead to a further 100-plus clubs closing with the loss of more than 2,500 jobs and further damage to local communities

Ian Swales (Liberal Democrat, Redcar)

I am interested in the hon. Lady’s calculations and numbers. Does she believe that the amendment is revenue-neutral or does it entail a tax cut?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hear what the hon. Gentleman is saying and, as ever, he has made a powerful contribution. I should like to put those figures and questions to the Minister, and I hope that she will be able to come forward in the spirit in which the amendments have been tabled by my hon. Friends. She has made much play of listening to industry in relation to other parts of the Bill and trying to work with industry to come to a consensual position, so I hope that in that context, she will give an assurance that she will take the figures, look at all the information provided by the industry and come back to us before Report, or before the Bill proceeds further, in order that we can scrutinise it more carefully and look at the issue again. Given that we are under a bit of pressure at the moment to get through the clauses, I will give the Minister the opportunity to respond.

Chloe Smith (Conservative, Norwich North)

I shall try to be as quick as possible, although there are a number of points I need to respond to.

Clause 190 and schedule 94 introduce machine games duty, or MGD. Where MGD is payable, it will replace both amusement machine licence duty and VAT, and it will come into force on 1 February 2013. The reform to gaming machine taxation will put tax revenues from gaming machines on a more sustainable footing.

The hon. Member for Kilmarnock and Loudoun asked me what the benefits are and why we were making the change. The benefits of introducing a gross profits tax are as follows: amusement machines face a more complex regime, as they are subject to amusement machine licence duty, a licence fee for each new gaming machine and VAT on net takings. Compared with other gambling regimes, it is inconvenient to pay and a cash-based system is not able to deal with technological changes, or changes to social regulations, with the same flexibility. Machines making equal profits can also pay different levels of duty if they are in different categories. The reform is

“right because the new system would be fairer.”––[Official Report, Finance Public Bill Committee, 17 May 2011; c. 180.]

I hate to pull this kind of trick, because of course those are not my words, but those of the hon. Member for Bristol East (Kerry McCarthy), speaking in the debate on last year’s Finance Bill from the position where the hon. Member for Kilmarnock and Loudoun is sitting today.

I shall explain why I—like the hon. Member for Bristol East and the Labour party when they began these reforms in government—went ahead with the reforms, before coming to the broader points that have been made by Members today. The VAT treatment of gaming machines has been challenged in the courts, as some Members will be aware, and any Government have to respond to such challenges. The point I have made in relation to previous clauses before us today is one—naturally enough, in a Finance Bill—of needing to secure the public finances, which we have to pay for, after all. Introducing machine games duty and exempting dutiable machine games from VAT will protect tax revenues, and will ensure that operators of those machines continue to make a fair contribution to tax receipts. MGD will also support the objective of a fairer tax system by ensuring that the taxation of machine games is more closely linked to machine takings, as, indeed, the hon. Member for Bristol East said last year.

The Government first announced their intention of going ahead with the reform of gaming machines and introducing MGD in December 2010. That decision followed a consultation on the taxation of gaming machines launched by the previous Government in July 2009. Following a second consultation over the summer of 2011 on the design characteristics of MGD, significant amendments were made to MGD based on feedback received. In particular, the Government limited the scope of MGD to machines offering cash prizes greater than stakes. That measure—here I begin my reassurance of hon. Members who have asked questions today—will help to support many small family entertainment centres with non-cash prize machines, such as crane grabs and so-called redemption machines. The Government have also excluded B3A lottery machines from the scope of MGD.

I turn to the rates and costings relevant to MGD, as that is the subject of much of what we have discussed today. MGD will be charged on the net takings from playing dutiable machine games, which are games played on a machine from which customers hope to win a cash prize worth more than their stake. There will be two rates: the standard rate will be 20%, and the lower rate will be 5% of net takings The lower rate will apply to machines with maximum stakes of 10p and maximum cash prizes of £8. The lower rate will particularly help to support many small businesses that are commonly found at British seaside resorts. Again, I seek to emphasise to the Committee that I am well aware of the industry’s concerns in relation to the measure, and we have taken steps to help many of the industries referred to today.

Let me set out the argument about revenue neutrality, which has been referred to. The rates of MGD have not been set to raise additional revenue. Instead, the revenue from MGD will replace that from amusement machine licence duty and VAT on dutiable machine games on a revenue-neutral basis. I am happy to repeat that commitment today.

On that note, let me turn to the amendments that Opposition Members have tabled to the clause. Amendment 192, tabled by the hon. Members for Livingston and for Easington, proposes to allow businesses to offset a sum equivalent to the input VAT that becomes irrecoverable against MGD liabilities. I oppose the amendment for two reasons. The first is the impact on Exchequer revenues, and the second relates to the administrative burdens within the industry. The rates of MGD have been set to achieve revenue neutrality to the Exchequer. I shall come on to that shortly.

Ian Swales (Liberal Democrat, Redcar)

Is the Minister aware that small operators may rent their premises? Some may pay VAT on that rent, and others might not. There might be two premises next door to each other, and the fact that the irrecoverable VAT cannot be recovered may mean that the two businesses have distinctively different outcomes. Potentially, one could close and the other stay open.

Chloe Smith (Conservative, Norwich North)

I am aware of that scenario, and of the range of different decisions that businesses across the industries in question will take. I do not think it is fair for the Treasury to be held responsible for decisions on whether to rent or buy, or for myriad other decisions pertaining to a business. I can reassure the hon. Gentleman that the loss of recoverable VAT was taken into account when the MGD rates were set. If it had not been done that way, MGD rates would have been set significantly higher, based in part on data supplied by the industry. I am happy to repeat that point if necessary. It is the crucial argument to make in response to what trade bodies have been putting about in relation to irrecoverable VAT. If one does the maths, the figures would have come out higher if things were not done this way. Again, we are in revenue-neutral territory.

John Mann (Labour, Bassetlaw)

Are those Treasury figures that the Minister is quoting, or ones checked by the Office for Budget Responsibility or an outside body?

Chloe Smith (Conservative, Norwich North)

Allow me to come to that in due course. I have a whole series of comments that will cover everything. I said that I opposed amendment 192 on two grounds. The first is on Exchequer revenue grounds. To allow business to offset a sum equivalent to the input VAT that becomes irrecoverable without a corresponding increase in MGD rates would cost the Exchequer in the region of £200 million per annum. That would not be advisable given that the most important task facing this Government is to reduce Britain's debt. The second reason is that the proposal would also be administratively very burdensome for both businesses and Her Majesty’s Revenue and Customs.

Grahame Morris (Labour, Easington)

I am intrigued. In the last group of amendments, the Minister’s criticism was that we were following our Front Benchers and just asking for a review. Now when we have asked for something specific—a 15% rate, which is in line with what was requested by the consultants engaged by the industry—the Minister has been dismissive of the modelling. They are concerned that a third of bookmakers could go out of business. Surely that must affect the Treasury’s revenue.

Chloe Smith (Conservative, Norwich North)

I am grateful to the hon. Gentleman for that intervention, because I was feeling that I had been a bit harsh in the previous debate on the topic of whether a review was a good thing. I trust that he will realise from what I am doing that I am engaging in the substance of what he is highlighting in his amendment. Let me reassure him and other members of the Committee that I am in no way dismissive of what the industry is saying to me. Two consultations have been held on this topic, and all the responses have been considered. My predecessor and I met all the major trade organisations—in some cases repeatedly. We have met businesses large and small to discuss the measure. There is a list of meetings in the summary of responses, including those that officials carried out—meetings with 11 trade bodies and 21 individual companies. I put it to the Committee that that constitutes fairly serious engagement with industry.

To deal with the detail, as the hon. Gentleman requests me to do, under his proposal businesses would need to calculate both the input VAT actually claimed against businesses’ VAT-able supplies, and what they would have been able to claim had machines continued to be subject to VAT. Businesses would need to do that every quarter. In addition, subsequent adjustments would be required when the full partial exemption information became available after the annual adjustments had been made. That is not a reasonable burden to ask businesses, particularly at the small end, to take on, because it would leave them astride two different systems. The Bill seeks to create a fairer system to replace both amusement machine licence duty and VAT, as I have outlined. I ask the hon. Gentleman not to press amendment 192 to a vote on the two grounds I have set out.

I apologise for potentially keeping hon. Members from their football, but it is important that I answer Committee members’ questions. Amendment 193 was tabled by the hon. Members for Easington and for Livingston to reduce the standard rate of machine games duty to 15%. I have already set out the kind of impact that that could have on Exchequer revenues. As I have said, the rates of MGD have been set in a way that is intended to achieve revenue neutrality for the Exchequer. The policy costings document published alongside the Budget outlines how rates have been calculated. The hon. Member for Bassetlaw will be overjoyed to know that those costings have been independently scrutinised by the OBR, which he fêted in his intervention.

The Government have also published a technical note, which the hon. Member for Redcar will be keen to read, if he has not done so already, describing the data and methodology used to calculate the standard and lower rates of MGD in greater detail. The note shows how, based on a thorough analysis of all the available evidence, the rates are set in a way that is intended to achieve revenue neutrality for the Exchequer. The industry is saying, “Well, are you sure about that?” and yes, I am sure about that. The data used in HMRC’s modelling has been collected from many sources. Statistics from the Gambling Commission underpin many of the inputs, although those have been corroborated by and adjusted for other sources of information, including the consultation responses that I referred to earlier.

John Mann (Labour, Bassetlaw)

The Minister referred to the huge amount of intricate and complex detail that the Treasury used to calculate this guesstimate, and then said that the Office for Budget Responsibility had been able to verify it. How possibly could a small, poorly resourced body like the OBR do that level of calculation necessary to verify the statistics? Is the Minister suggesting that this has been nodded through by the OBR? That brings in wider questions, not for this Committee, about what on earth is going on if the OBR is able to verify things that require that level of intricate detail and are disputed by the betting industry.

Chloe Smith (Conservative, Norwich North)

I refer the hon. Gentleman to two sources. The first is the technical note that I have just mentioned. I suspect that he has not yet had the pleasure of reading it, but it outlines exactly how the figures were arrived at and validated. The second source is the published costings of all measures in the Budget, in which the hon. Gentleman will be able to see perfectly well that the OBR has the capacity to work through that amount of data.

When the hon. Gentleman was late for this morning’s sitting, he and I had a conversation outside the Committee Room about ways in which we could hold a Budget to account. I applauded him for the detailed and forensic job he was doing on this Committee before he gets relegated back to the Information Committee. I am sure that he knows from his work this summer that the OBR is capable of achieving the same feats as he is. I hope that we will have his company for many seasons to come.

Ian Swales (Liberal Democrat, Redcar)

I referred to the Chancellor’s suggestion that he might be willing to publish more data. Would the Treasury be prepared to publish the kinds of details under discussion, so that the industry can see where its numbers are wrong, if, indeed, the Economic Secretary is right?

Chloe Smith (Conservative, Norwich North)

That is exactly what the technical note, which has been published and is available on the Treasury website, does. I suspect that, as we speak, the industry is taking a close look at it, as it is more than welcome to. I reassure the Committee that the data and methodology used have arrived at the correct rate for the reform.

On the question of winners and losers, the analysis shows that seaside arcades and the majority of pubs will gain from the machine games duty, while bingo operators will, on average, lose out marginally. The losers will be casinos and licensed betting offices. Members may wish to keep that information in mind and question who is telling them what when they are being briefed.

On 21 March, the AMG Leisure website cited an adult game centre owner who said, referring to the changes:

“At the moment I am paying both vat and license duty which is nearly 40% of turnover at my AGC. This way I am not restricted on the amount of…machines and am paying 20%...I know we cannot claim VAT back on purchases but I still feel I will benefit as a whole.”

I know that that is but one business owner, but it is an important voice that needs to be heard alongside those cited by other members of the Committee.

Let me wrap up by saying that the most important task is not only for England to win their match tonight, but for the Government to reduce Britain’s debt. As has been said this afternoon, if we did not do that, it would be worse for everybody. I therefore oppose the amendments and ask that the Opposition do not press them to a vote. Last year, the hon. Member for Bristol East (Kerry McCarthy) said:

“Given the urgent need to protect revenues now and to maximise revenues that will not impact families directly, such as gambling duties”––[Official Report, Finance (No. 3) Public Bill Committee, 17 May 2011; cc. 179.]

I will complete the sentence for her: we ought to go ahead with this reform and improve the sustainability of the gaming duties regime.

Peter Bone (Conservative, Wellingborough)

Mr Morrice, do you want to press either of your amendments to a vote?

Graeme Morrice (Labour, Livingston)

Thank you, Mr Bone. We have made our arguments and I hope that the Government have listened. Being a genuine Scot, I do not wish to keep hon. Members away from the football—it would be too risky for me—so I do not wish to press the amendments to a vote.