FINANCE BILL

Public Bill Committee, 4 June 2013.

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 29 - Restriction on surrender of losses: controlled foreign company cases

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Good morning, Mr Crausby, it is a pleasure to be here again under your chairmanship.

Clause 29 is one of the three clauses in chapter 3 that seek to close loopholes in the loss relief rules. I am sure that Committee members will have read the technical note to the clause, which explains:

“The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Relief is based on the following underlying principles: Brought forward trade losses should only be relievable against future profits from the same trade, carried on by the same legal entity; Tax losses should not be transferable against profits of unconnected parties; The movement of losses between companies should only be allowed where they are under common economic ownership for the accounting period when the losses arise.”

In line with those principles, companies can therefore offset losses against profits to gain relief in a number of ways, with specific loss relief and reorganisation rules to prevent companies passing the benefit of a loss to a third party. In the words of the technical note however,

“HMRC have seen a marked increase in companies entering into arrangements to circumvent these rules.”

The Chancellor consequently announced at Budget 2013 that three specific loopholes identified in the loss relief rules would be addressed through this year’s Finance Bill and should take effect from Budget day—20 March.

The group relief rules seek to ensure that a loss is first relieved against other profits of the company in which it arose before it is available for surrender, by way of group relief, to other companies in the group. Various categories of losses, expenses and deficits can be surrendered under the group rules. Controlled foreign company apportioned profits are taxed through the UK company at an amount equivalent to corporation tax, so no amount in respect of the CFC-apportioned profits is currently included within the calculation of gross profits, and they therefore do not impact on the restriction outlined in the Corporation Tax Act 2010. That brings us to Clause 29, which amends section 105 of the CTA 2010, so that chargeable profits of a CFC that are apportioned to a surrendering company will be included as gross profits, and will therefore be included in the threshold, which amounts—listed in four categories under which they can be claimed—must exceed before group relief is available.

I outline the basic details, because there are a few issues that I would be grateful if the Minister clarified. The tax information and impact note indicates that closing the loophole, alongside the loopholes dealt with in clauses 32 and 33, will result in an additional yield to the Exchequer of £35 million in this financial year, rising to £40 million in 2014-15, before decreasing to £25 million in 2016-17. Additional revenue as a result of closing a loophole is of course extremely welcome, but could the hon. Gentleman shed some light on the meaning of the phrase

“a marked increase in companies”

exploiting the loopholes, specifically the loophole dealt with by Clause 29? How many companies? Over what period of time? How was the loophole first identified? Was it identified by HMRC? How much is thought to have been lost to the Exchequer, both before and after the loophole was spotted? Can the Minister explain the variation in the annual yield expected from closing the loopholes? Perhaps awareness of the loophole explains the decrease to £25 million by 2016-17, but I would like to hear the analysis of the yield. Has HMRC assessed any pattern in the types of companies concerned? Does the Minister know whether this particular loophole has been marketed in any way to particular types of company?

David Gauke (Conservative, South West Hertfordshire)

Thank you, Mr Crausby. It is a great pleasure to serve under your chairmanship once again. I am sure all hon. Members are delighted to be back in Committee. I particularly welcome the Labour Members who have joined us. For some time I feared that the balance of the Committee was inadequate, so I am pleased to see them join us.

Clause 29 is part of a package of measures, along with clauses 32 and 33 and schedule 13, that amend corporation tax loss relief rules to close three loopholes that have allowed companies to gain greater or quicker relief for losses than was the intention of Parliament. I am grateful to the hon. Member for Newcastle upon Tyne North for setting out some background to the clause. None the less, it might be helpful to the Committee if I say a little more.

The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Loss relief, since the inception of corporation tax in 1965, has been based on the following underlying principles: brought-forward trade losses should be relievable only against future profits from the same trade, carried on by the same legal entity; tax losses should not be transferable against profits of unconnected parties; and the movement of losses between companies should be allowed only where they are under common economic ownership for the accounting period when the losses arise. Within those principles, companies can gain relief for losses through set-off against profits in a number of ways, and there are specific loss relief and business reorganisation rules to prevent companies from passing the benefit of a loss to a third party.

However, HMRC has seen a marked increase in companies entering into arrangements to circumvent the rules. Three specific loopholes, which have been exploited to sidestep the rules, have been identified. Two loopholes allow companies to avoid the consequences of rules designed to prevent profitable companies from buying other companies to access relief for those other companies’ losses. Those loopholes are addressed by clauses 32 and 33 and schedule 13. The third loophole is the subject of clause 29. It allows companies to convert gross profits into apportioned profits from a controlled foreign company. This enables the company to secure a greater amount of group relief than should otherwise be available.

The current rules allow certain expenses and losses to be surrendered for group relief only to the extent that they exceed the gross profits of the surrendering company. The loophole exploits the fact that prior to this change, CFC profits apportioned back to a UK company are not included within its gross profits. Such companies are therefore free to surrender expenses and losses, certain of their own in-year losses, to others in their group without, as the underlying principles of loss relief intend them to do, first setting them against their own gross profits, including amounts apportioned by CFC rules.

The Government are addressing all the identified loopholes through amendments to strengthen the current UK loss rules in line with the underlying policy principles. Clause 29 amends the group relief rules in part 5 of the Corporation Tax Act 2010 to ensure that chargeable profits of a CFC apportioned to a company are included with gross profits in the threshold, which must be exceeded before certain losses can be surrendered. To ensure that the Exchequer is protected from any further exploitation of that loophole, the change will have effect in relation to any chargeable profits of a CFC falling on or after 20 March 2013, the date of its announcement at the previous Budget.

The hon. Member for Newcastle upon Tyne North asked how many companies are likely to be affected by the clause. It is not, in truth, possible to answer that question, because the number of companies affected will depend upon the future tax planning choices of companies. However, it would be fair to say that HMRC is aware of the scheme that the clause closes being used in the past 12 months.

The annual variation in yield is based on the fact that the Office for Budget Responsibility growth predictions, and other factors such as behavioural changes in response to anti-avoidance legislation, are factored into the calculation. As for how the scheme was first identified, four cases have been identified by HMRC so far. It would be fair to say that none of those uses of the scheme has been marketed as such; there has been no particular pattern in the use of the scheme and no particular sector has been represented. It is not possible to say how much has been lost to the Exchequer already, but we have moved swiftly to close the loophole.

There is, I suppose, a broader question about why we are moving now on some of the avoidance behaviour related to loss relief. Since the economic downturn of 2007-08 and onwards, there has been a sizeable increase in corporation tax losses, which has increased the potential for loss relating to loopholes that relate to corporation tax losses. The Government want to ensure that companies pay their fair share, which is why we have taken action in the Bill to address those loopholes.

I am sure that all hon. Members agree that in making the UK corporation tax system as competitive and business friendly as possible it is vital to ensure that it is fair, and that rules and principles cannot be sidestepped. The clause brings loss relief rules more closely into line with their underlying principles and in doing so provides valuable protection to the Exchequer.

Clause 30 - Loss relief surrenderable by non-UK resident established in EEA state

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As with clause 26, which we dealt with before the recess, clause 30 was introduced as a result of a decision by an EU institution. In this case, it is the Court of Justice of the European Union rather than the Commission—I hope that the very mention of those organisations does not induce swivel-eyed behaviour from Government Members. Deriving from the September 2012 Court of Justice decision in the case of Philips Electronics UK Ltd, and first announced on 11 December 2012, the measures in the clause amend the restrictions on when companies resident in the European economic area can surrender losses attributable to their UK permanent establishments as group relief from corporation tax in this country.

Under section 107 of the Corporation Tax Act 2010, companies resident in the European economic area have been subject to the same rules as non-European economic area resident companies, which meant that group relief was denied to those companies where losses were potentially deductible overseas, even if no overseas deduction had been claimed, in order to prevent the double use of losses. The Court of Justice judgment in Philips Electronics UK Ltd ruled that section 403D of the Income and Corporation Taxes Act 1988—the precursor to section 107 of the Corporation Tax Act 2010—was a restriction on the freedom of establishment that could not be justified by overriding reasons in the public interest, and was therefore unlawful and must be disapplied.

With the Government’s attempt to make the UK compliant with EU law, and under the provisions of clause 30, with effect from 1 April 2013, there are now fewer restrictions on when EEA-resident companies can surrender losses from their UK permanent establishments as group relief in the UK. The new restrictions are based on the actual use of losses, or part thereof, in any country in any period, rather than on their potential future use in another country. Only the amount that is actually used is barred from group relief.

According to the tax information and impact note and the updated technical note, the measure will have no impact on the Exchequer. However, as with most things related to Europe and this Government, a number of very serious concerns have been raised. The fairly damning conclusion of the Chartered Institute of Taxation on the Government’s proposed remedy to the Court of Justice judgment reads as follows:

“The unlawfulness of section 403D (and consequently section 107) relate to the UK’s denying group relief where there is any prospect of any part of the loss of a UK permanent establishment of a non-UK resident EEA company being used by the non-UK resident company in the country of residence of that company.

The proposed changes to section 107 for UK PEs of a company resident in a country in the EEA are to limit that denial of group relief to where the UK permanent establishment’s loss, or some part thereof, is actually used in another EU country, and then only the amount that is used is barred from group relief.

In Philips, the UK Government’s justification with regard to the allocation of taxing powers…was rejected by the Court of Justice: the Court of Justice pointed out that the UK Government remained just as able to tax the UK permanent establishment if its losses were wholly or partly used in another country as if they were not. The Court held that the UK as the source country has the primary obligation to give loss relief and that a similar bar does not apply to losses of UK subsidiary companies.

The proposed changes to section 107 merely narrow the circumstances in which group relief is denied. However, since the Court of Justice rejected the UK Government’s public policy justification for any denial of group relief, these changes do not address the findings of the Court of Justice, whose conclusion was that the section should not apply at all.

Accordingly, in our view, section 107 will remain unlawful as a matter of EU law even as amended by the proposed changes to be included in Finance Bill 2013.”

The Institute of Chartered Accountants in England and Wales shares that worrying conclusion:

“We are concerned that the proposed changes are not sufficient to fully implement this decision.”

It points out that before the change,

“group relief [was] not available if losses [were] potentially deductible overseas, even if no overseas deduction [was] claimed. The proposed amendment removes this restriction for UK permanent establishments of EEA companies, and replaces it with a different condition which effectively requires that the loss is not deducted for foreign tax purposes in any period.

The change means that the provision should operate more proportionately (so that relief is only restricted to the extent that a loss is actually deducted overseas), but we do not consider that this goes far enough to address the Court of Justice decision in Philips Electronics. The issue of proportionality only arises in circumstances where a measure which restricts a fundamental freedom can be justified; in which case the measure must none the less be proportionate.

However, in the Philips Electronics case the Court of Justice concluded that section 403D(1)(c) of the Income and Corporation Taxes Act of 1988 (now rewritten to section 107(5) and (6) of the Corporation Tax Act 2010) is a restriction on the freedom of establishment which cannot be justified by overriding reasons in the public interest, and that the provision should be disapplied.

We therefore consider that it would be more appropriate to remove Condition C for UK PEs of EEA companies, without imposing any further conditions for those companies.”

So, as with clause 26, we once again find ourselves discussing the Government’s attempts to make legislation EU-compliant, attempts that the leading bodies for tax professionals believe are not up to the mark. Indeed, only last month, in an even more damning assessment of the Government’s approach in this area, the new president of the Chartered Institute of Taxation stated in his inaugural speech:

“Too often the UK Government acts too late or does too little, and fails in its responsibilities. Take the Finance Bill currently going through Parliament. It contains five provisions specifically intended to ensure that UK law complies with EU law. In the view of the experts on the Institute’s EU and human rights sub-committee at least four of them will not achieve this objective. This is crazy. This slapdash approach to complying with rules that we help set, and which help ensure that the single market can operate fairly, is failing UK taxpayers. It needs to change.”

Those are strong words. I would therefore be grateful if the Minister could address the fairly fundamental concerns expressed by both the Chartered Institute of Taxation and the ICAEW. Given the issues just outlined, how confident is he that the clause is compliant with EU law? Will we find ourselves discussing this issue again in a future Finance Bill? Why have the Government chosen to respond to the European Court of Justice judgment in that way, rather than in the way proposed by some of the tax professionals I have cited? Could he also respond to the comments from the incoming president of the Chartered Institute of Taxation, particularly the concern that the Government are acting too late, doing too little, failing in their responsibilities, operating with a crazy, slapdash approach and failing UK taxpayers?

David Gauke (Conservative, South West Hertfordshire)

As we have heard, the clause makes changes to ensure that the UK group relief rules for non-resident companies with loss-making UK branches are compatible with EU law. The current rules prevent non-resident companies with UK branches setting their UK branch losses against other UK profits if they could potentially be relieved against non-UK profits, even where they were not in fact relieved against non-UK profits. The Court of Justice of the European Union ruled in the Philips case that preventing group relief for UK branch losses because they could potentially be relieved against non-UK profits was not compatible with EU law.

The changes made by the clause will restrict group relief for UK branch losses of companies resident in the European economic area only where the losses are actually relieved against non-UK profits. UK branch losses that are relieved against non-UK profits will reduce the amount that the EEA resident company can surrender as group relief in the UK. If the UK branch losses are relieved against non-UK profits after the losses have been surrendered in the UK, the amount available for surrender is still reduced. Existing legislation requires the surrendering company to withdraw any previous surrenders it made to the extent that they exceed the new lower amount available for surrender.

The clause was published for technical consultation on 11 December 2012. Respondents to that consultation wanted all restrictions to be removed for EEA resident companies. However, if we were to adopt that approach, which is the approach advocated by the Chartered Institute of Taxation, UK branch losses could be surrendered for relief against UK profits elsewhere in the group, even if they had also been relieved against non-UK profits. That would provide tax planning opportunities for multinational enterprises to obtain relief twice for the same losses. The Government have not therefore adopted this suggestion.

The clause will mean that the group relief rules will be compatible with EU law without providing tax planning opportunities for multinational enterprises. The Government believe that the amendment is consistent with the judgment in the Philips case, which necessitated the change, but equally, in complying with the Philips judgment, we do not want to provide an opportunity whereby the same loss could be used for more than one set of circumstances. I hope that satisfies the Committee.

Clause 31 - Arrangements for transfers of companies

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 31 is a technical, tidying-up measure that would take effect from 1 April 2013. It makes specific changes to the types of arrangement that are exempt from the anti-avoidance rule affecting the group relief contained in part 5 of the Corporation Tax Act 2010.

As hon. Members will be aware, some statutory public bodies set conditions or requirements for companies operating in specific sectors that are members of wider groups and with whom they have certain commercial agreements. Section 154 of the 2010 Act prevents access to group loss relief where there are arrangements in place, meaning that at some point in the current or a future accounting period a company could cease to be a member of a group. The rule is intended to prevent the use of loss relief where it would amount to loss buying, but it is not intended to prevent access to group loss relief where legitimate commercial arrangements are in place.

However, the anti-avoidance rules in sections 154 to 156 of the 2010 Act have inadvertently restricted access to group loss relief to companies that have commercial arrangements with public bodies. I suppose clause 31 is designed to assist such companies, so that any conditions imposed by or agreed with a statutory public body will not be arrangements that prevent the flow of group relief.

As the tax information and impact note states, the policy objective of the measure is to

“ensure the group loss relief anti-avoidance rules are more effectively targeted for the future. They will continue to restrict access to relief where none is intended while allowing improved access where it is, helping to maintain the fairness and competitiveness of the tax system.”

The Opposition of course support that aim. Companies that enter commercial arrangements with statutory public bodies should not be inadvertently penalised for doing so.

The note also suggests that the measure will have a “negligible” impact on the Exchequer and on business. Will the Minister confirm how many companies are thought to have been inadvertently affected by the existing legislation, and at what cost? The note, published on 11 December 2012, requires greater clarity. It states that such businesses

“will not be able to benefit from the Group Relief scheme. To do so, they will face a negligible one-off cost in familiarising themselves with the appropriate regulations and a negligible increase in ongoing administrative burdens from supplying information to HMRC to claim group loss relief.”

Does that mean that they will not be entitled to benefit from the group relief scheme, or that they will not derive any benefit because of the cost of doing so? It would be useful to the Committee if the Minister could clarify that.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, clause 31 will change the corporation tax group relief rules to remove an unintended and inappropriate restriction in current anti-avoidance legislation. Corporate tax legislation has long contained rules designed to prevent the abuse of group relief. A part of the rules prevents access to group relief where there are arrangements in place that enable a company at some future point to cease to be a member of a group.

That rule is intended to prevent manipulation of the control, and thus the group status, of a company so as to enable relief for losses to be transferred between unconnected parties. However, we have become aware that the rule is causing an inadvertent restriction in wholly unintended scenarios. In particular, it has been catching corporate groups undertaking legitimate commercial activities where specific conditions are imposed upon them by a statutory body.

An example of that is where a company contracts with a public body to undertake work or to provide services through a company, the ownership of which is specified to revert back to the public body at the contract’s end. Under the arrangements rule, that entirely sensible structure prevents such a company from accessing group relief. To rectify this, the changes made by clause 31 will expand the types of commercial arrangements that are exempt from anti-avoidance rules affecting group relief. Companies inadvertently restricted from the group relief scheme through specific conditions imposed upon them by a statutory body will no longer have their access to group relief restricted. The amended rules will continue to ensure that they prevent manipulation of company control.

The hon. Lady asked how many individuals and companies will be affected by these changes. Currently we are aware of a small number of corporate groups affected by the problem, and no individuals. However, the amendment will ensure that any other similarly affected companies will also benefit from improved access to loss relief.

We believe that the administrative burdens for companies that previously could not benefit from the scheme will be negligible, and companies that are not affected by this clause will not face an additional administrative burden as a consequence of it. It might be helpful to provide a little more detail to explain our estimate of the cost to the Exchequer, which was described as negligible in the tax information and impact note. We anticipate that the Exchequer impact will be about £4 million loss per year over five years. I hope that provides a helpful clarification. I am grateful to the hon. Lady for her support for the intention behind the clause, and I hope that it will stand part of the Bill.

Clause 32 - Change in company ownership: company reconstructions

Catherine McKinnell (Labour, Newcastle upon Tyne North)

We now return to the issue covered in clause 29. Clause 32 is being introduced as one of the three clauses in chapter 3 to close down loopholes in the loss relief rules. Like clause 29, this measure was announced at Budget 2013 and took effect on Budget day, 20 March.

Clause 32 relates to the treatment of losses in the event of a company reorganisation, resulting in a change of ownership, with a change of ownership defined by the Corporation Tax Act 2010 as where 51% of the company’s shares change hands. As the technical note explains:

“Where a trade is transferred between companies under common ownership, the normal rules—that company losses should belong to the company and trade that incurred them—are suspended and any losses brought forward are allowed to transfer with the trade. However, different rules apply where trade is transferred between unconnected companies.”

Intended to counter the practice of loss buying, chapter 2 of part 14 of the Corporation Tax Act 2010

“sets out that, in such circumstances, restrictions”—

on the use of losses—

“apply if there is a major change in the nature”—

or conduct—

“of the trade, investment business or UK property business carried on by a company within three years of the change of ownership”,

or

“where the change in ownership occurs after the company’s activities in a trade become small or negligible and before any significant revival”.

I am sure that the Minister will outline some of the more technical aspects of the clause in a little more detail, but I want to draw the Committee’s attention to the technical note that relates to clauses 29, 32 and 33, which states that,

“HMRC have seen a marked increase in companies entering into arrangements to circumvent these rules.”

The tax information and impact note indicates that closing this loophole, alongside the loopholes dealt with in clauses 29 and 33, will result in an additional yield to the Exchequer of £35 million in this financial year and £40 million in 2014-15, before decreasing to £25 million a year by 2016-17.

I reiterate that that additional yield to the Exchequer and the closure of any loopholes is extremely welcome, but I would be grateful if the Minister would confirm how many companies have been using the loophole identified in the clause, and over what time period. In responding to clause 29, he mentioned that HMRC had acted swiftly to close down that loophole, but he did not state when it was first identified. Will he clarify that and quantify how much may have been lost to the Exchequer? I appreciate that, in relation to clause 29, he explained some of the difficulties associated with giving an exact figure, but will he give a figure, in relation to this clause, of what is thought to have been lost to the Exchequer both before and since the loophole was spotted, and will he tell us whether HMRC has assessed any pattern in the types of companies or sectors who may have used the loophole, or to whom it was marketed?

David Gauke (Conservative, South West Hertfordshire)

Clause 32, as we have heard, is part of a group of clauses, which addresses, in broad terms, the way in which corporation tax loss relief can be used in a manner that is not consistent with Parliament’s intentions, and the principles behind loss relief. I will not run through the full background again as I did with clause 29, but I will set out a little detail about clause 32, which relates to one of those loopholes.

Loss relief legislation, in part 14 of the Corporation Tax Act 2010, contains rules to counter profitable companies buying losses from unconnected companies. Broadly, the rules apply to restrict relief if there is a change of ownership of a company and, within three years of that change, the trade or business that it carries on undergoes a major change.

Part 22 of the Act contains rules to enable transfers of trades within any group to occur without restricting or removing the ability to relieve losses. However, an anomaly in the way in which these two parts interact means that the loss-buying rules can be sidestepped if transactions are undertaken in a set order: if an intra-group transfer of a trade took place before the change in ownership of a company, the loss-buying rules applied, but if the trade occurred after the change in ownership, they did not. That has allowed, in certain circumstances, an acquiring group to access relief for losses that it should not otherwise have had.

The clause moves to address that loophole by inserting a new section 676 into part 14 of the Act, which will restrict relief for losses whether the intra-group transfer of the trade occurs before or after the company’s change of ownership. It will prevent the acquiring group from structuring the acquisition of the loss-making company so as to access relief for losses it should not otherwise have. New section 676 will have effect in relation to any change of ownership of a company that occurs on or after 20 March 2013, the date on which the change was announced in the Budget.

I was asked how many companies are likely to be affected by the proposals. I cannot answer that precisely, because it depends on companies’ future tax planning choices. I do not have to hand the exact total of recent cases of which HMRC has become aware, but it has seen an increasing number of such cases recently, which is why the Government have taken action to close the loopholes. No figures have yet been collated on how much revenue has been lost to the Exchequer, but the potential problems have been documented by way of companies undertaking reconstructions. Unfortunately, I cannot give precise answers to the hon. Lady’s questions, but there is support across the Committee for ensuring that loss-relief rules more closely reflect their underlying principles and, in so doing, provide a valuable protection to the Exchequer.

Clause 33 - Change in company ownership: shell companies

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss that schedule 13 be the Thirteenth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 33 is the third measure in this chapter dealing with loopholes in the loss-relief rules, and I am sure the Minister will describe it in more detail. It is designed to counter loss buying with regard to shell or dormant companies, and it is the third part of the jigsaw of welcome tax avoidance loophole-closing measures.

I want to take this opportunity to ask the Minister for further clarity, either now or in writing when the information is available. In our debate on the previous two clauses, I asked how many companies had been using the loopholes and for how long, and he replied that the number of cases relevant to clause 32 was not readily available. In addition, we do not know when the loophole was first identified and how much revenue has been lost. Through our scrutiny, we seek to find out how the Government have calculated the amount of protected revenue or increased revenue to the Exchequer that will result from the closure of the loophole, and whether that calculation can be relied on. The Opposition support the measures, but it would be useful for the Committee to have further detail on how the figures have been calculated and the number of companies that may be affected.

David Gauke (Conservative, South West Hertfordshire)

Loss relief legislation in part 14 of the Corporation Tax Act 2010 contains rules to counter profitable companies buying losses from unconnected companies. The rules apply to changes in the ownership of companies carrying on a trade, property business or investment business and do not cover shell companies, by which is meant companies that do not carry on a trade, property business or investment business. Corporate groups exploit the loophole by stripping a company of all its activity, making it a shell company but leaving behind certain non-trading losses. The shell company can then be sold to a new group, and those losses accessed, without the rules preventing loss buying being triggered.

Clause 33 and schedule 13 address that loophole by introducing a new chapter, which applies to a shell company that undergoes a change in ownership, to part 14 of the 2010 Act. Where the new chapter applies, it restricts relief for non-trading losses in the period before the change in ownership. The new chapter will have effect on any change in shell company ownership that occurs on or after 20 March 2013, which was the date of the announcement of the change in the Budget.

On the basis for the accuracy of the costing, the figures have been based on actual instances. They have been approved by the independent Office for Budget Responsibility, which has been provided with information by HMRC.

It is difficult to give too much information on all the specifics, but I will, as the hon. Member for Newcastle upon Tyne North has requested, try to provide her with as much information as I can on the instances that led to this action being taken. There is a concern, as I have mentioned, that as many companies have incurred considerable losses over the past six or seven years or so, the opportunity to exploit some of those losses in a way that Parliament did not intend is greater than at other points in the economic cycle. We therefore have to be particularly vigilant to ensure that that does not happen. That has driven the action we are taking in clauses 29, 32 and 33 and schedule 13. I will write to the hon. Lady and the Committee providing such detail as I can, but it is not always possible to provide exact estimates, such as of the revenue already lost, which would be difficult to obtain.

With those comments, I hope that clause 33 and schedule 13 can stand part of the Bill.

Clause 34 - R&D expenditure credits

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss the following:

Government amendments 23 to 38.

That schedule 14 be the Fourteenth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 34 and schedule 14 make changes to how research and development relief is provided to large companies. The changes will increase the value of large company R and D relief, make the relief more visible in company accounts and provide greater support to innovative loss-making companies. The changes are designed to make R and D relief more effective in influencing large company investment decisions, and to help support long-term growth and productivity through the development of new skills, technologies and processes in the UK economy. Alongside the introduction of a patent box and the reduction in the corporation tax main rate to 20% by 2015, the changes represent another significant step towards the Government’s aim of creating the most competitive tax system in the G20.

I shall now provide a little background for members of the Committee about these matters. In November 2010, the Government opened a consultation on how to improve the United Kingdom’s R and D tax relief schemes. Smaller companies wanted the Government to make improvements to their existing system, and the Government responded in the Budget 2011 by increasing the rate of the SME R and D tax credit from 175% to 225% and removing several potential barriers to early-stage companies and start-ups claiming under the scheme.

Large businesses instead favoured a change in the way in which R and D relief is delivered. They wanted to be able to account for relief above the tax line, where it would be more visible to decision makers and of more benefit to foreign-parented multinationals looking to invest in the United Kingdom. They also wanted R and D relief to support and incentivise companies fully with no corporation tax liability, as those companies may be unable to benefit from the existing super-deduction despite having significant R and D investment and employment in the UK. The clause responds to those views by introducing the R and D expenditure credit, also known as the above the line or ATL credit.

The changes made under clause 34 and schedule 14 introduce legislation for companies to claim a taxable ATL credit for their qualifying R and D expenditure. Unlike the current system, which works by reducing a company’s profits liable to corporation tax, the ATL credit will work in a similar way to a grant, but it will be administered and settled through the corporation tax system.

Crucially, all companies will be able to benefit from the credit, irrespective of their corporation tax position. While the credit will be used first to settle against any corporation tax liability that a company owes to HMRC, any remaining amount will become payable in cash. That will greatly increase the financial and cash flow support for loss-making companies and help to acknowledge the unique risks and uncertainties that exist for companies investing in R and D, and innovation. It will also allow the credit to be accounted for above the line in a company’s profit and loss account, a key policy objective that will make it easier for companies to demonstrate the true cost of R and D investment to decision makers.

The measure introduces the credit at a headline rate of 10%. Relative to the current system, that will increase the cash value of R and D relief from around 7% to around 8% of a company’s qualifying expenditure. It further reduces the business cost of R and D investment in the UK, supporting more than 2,450 existing claimants and helping to attract the R and D activity of mobile overseas investors. It also increases the steady state cost of the reform to about £250 million a year. In the current economic and fiscal climate, that represents a strong signal of the Government’s long-term support in such matters.

The clause introduces the ATL credit alongside the existing super-deduction in April 2013, and legislates for the ATL credit to replace fully the super-deduction in April 2016. In the short term, that will provide time for companies to make the transition to the new system and help to maintain support for companies in the defence sector, while the treatment of R and D relief in Ministry of Defence contracts is reviewed independently. In the longer term, that will allow for a simple system of R and D relief that will incentivise both domestic and foreign-parented companies to invest in R and D in the UK. It also reflects views put forward at the consultation, in which about 70 respondents were in favour of the ATL credit fully replacing the super-deduction.

It is important that the Exchequer is protected from possible abuse of the ATL credit. The clause will achieve that result by capping the amount of credit that can be claimed by a company with no corporation tax liability by a measure of its UK R and D employment. The cap is not designed to be restrictive for genuine large company R and D claims, and the Government have taken steps to revise the cap in response to issues that were raised at the consultation.

I now turn to amendments 23 to 38. The ATL credit is intended to provide a consistent level of support to all companies so that they receive the same effective rate of relief irrespective of their corporation tax liability. Such consistency is crucial in ensuring that the credit can be accounted for above the line, where it will be more effective at influencing R and D investment decisions.

Following discussions with professional advisers, we have become aware that the legislation does not achieve the consistent treatment of profit and loss makers in certain circumstances. The amendments therefore make changes to address that and ensure that the legislation functions in line with the policy objective.

The legislation introduced by clause 34 and schedule 14 has benefited from open and extensive consultation. That is further evidence of how we have worked closely with business to ensure that the legislation is effective and that the positive impacts on UK R and D investment are realised.

In conclusion, the changes brought about by the clause and schedule aim to increase the generosity, visibility and certainty of UK R and D relief, and ensure that it represents best value for money for the taxpayer. Moreover, the changes reflect the importance that the Government attach to helping firms, and the wider UK economy, to increase their productive potential and improve their global competitiveness. I hope that both the clause and schedule will be accepted by the Committee.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to see you back in the Chair on this sunny morning, Mr Crausby, as we make good progress through the Bill. [ Interruption. ] I am glad to hear that we have the support of the Government Whip, who seems to be cheering on the work that the Opposition are doing to scrutinise the Bill, to look at it extremely carefully and, of course, to raise appropriate queries with the iron discipline for which we are renowned. It is perhaps now best to move swiftly on.

I am grateful to the Minister for outlining the purpose of clause 34, schedule 14 and Government amendments 23 to 38. Clause 34 gives additional relief for expenditure by a large company on research and development, which is currently given in a super-deduction against corporation tax profits. The amount of tax payable is therefore reduced. The Minister made it clear that the measure was designed to encourage more R and D by large companies, and that it replaces the current deduction system with the above-the-line credit to all large companies, including those that have no corporation tax liability. It is intended to make the benefits more visible and certain, and therefore to encourage greater investment. We are generally supportive of such measures.

The Minister stated that there has been consultation, which he referred to as “extensive”. I should probably recognise that he seemed to understand that the consultation had gone on for a considerable period. At least we are now in a position to take forward the views of the industry, which is, I understand, in agreement with these measures.

Fiona O'Donnell (Labour, East Lothian)

I am grateful to my hon. Friend for giving way. Nowhere is our iron will more strongly embodied than in her contributions to the Committee. Does she agree that it is vital that the Treasury examines closely how effective this measure is in Scotland? There is added uncertainty about the future there, not just because of the Government’s failing economic policy, but because of the uncertainty over the constitutional future of Scotland.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes an important point in relation to Scotland at present. The business community is voicing increasing concern about the ongoing uncertainty and the questions that are arising around the proposals by the SNP and the Scottish Government to break Scotland away from the rest of the UK. That is potentially putting off very important investment decisions. We are increasingly hearing that businesses want a degree of certainty in the times ahead. They want to know the tax regime that they will be operating under. They want to know what incentives the Government have to get growth on the agenda. My hon. Friend is right to say that the Treasury has an important role to play. Far be it from me to praise anything that the Government are doing at this stage, but the reports that outline the difficulties, although we have a different view of the way forward, are an important contribution to the debate in Scotland, which she is contributing to by mentioning it this morning.

To return to the issues in the clause, amendments and schedule 14, the Minister outlined the importance of encouraging large companies to invest in R and D by replacing the current relief with the new proposal. While the rules for the eligibility of expenditure on R and D remain essentially the same, the Government state clearly in the impact assessment that the measure

“will increase the attractiveness of the UK as a location for large company R&D investment by introducing a more visible, more certain, and more effective form of R&D relief.”

The Minister referred to the consultation, which started back in November 2010. In one response to the several rounds of consultation, the ICAEW said that the change to the above-the-line credit

“could have an impact for larger companies where the people involved in the R&D are likely to be more ‘disconnected’ from the accounting for the tax credits. We have always believed that if the R&D tax credit could be given in a way that directly impacts the budgets of those responsible for the R&D spend, then this should lead to an increase in the overall R&D spend.”

We all want to see that taken forward.

The Opposition welcome the changes being made to boost R and D investment by large companies and the knock-on effect that that would have on jobs in the economy. We strongly believe that the way to move out of these difficult economic times is to boost the economy and to get growth in our manufacturing and intellectual property sectors. The best way to ensure that people in our local communities have more money in their pockets is to get them into well-paid work. The opportunities that come from R and D and the knock-on effects on jobs in the economy are important.

Fiona O'Donnell (Labour, East Lothian)

I wonder whether my hon. Friend shares my concerns. On Friday, I visited the largest manufacturing employer in my constituency and it seems to be unaware of many of the measures that the Government are introducing. Does she have any indication of how the Treasury is working with Scottish Enterprise to ensure that Scottish businesses get the message?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend for that intervention. I must say that I do not have any indication as to how the Treasury is working with Scottish Enterprise, but I do know from visiting a number of companies and organisations both in my constituency and more widely in Scotland that there is a need to ensure that the links between the UK Government and the Scottish Government, and the connections through Scottish Enterprise, UKTI and all the other sources of support to business to encourage them to grow, continue. When the Minister responds to my questions, he may want to add my hon. Friend’s question to the list. I am sure that he will answer in due course.

For my part, I am pleased to see that after the many rounds of consultation there now appears to be a degree of consensus across the industry as to the benefits of the changes. However, bearing in mind the impact that the measure could have on the economy and the fact that the large companies affected by the measure are those with more than 500 employees, an annual turnover in excess of €100 million and gross assets in excess of €86 million, can the Minister clarify a few points in his response?

First, what assessment has been made of the measure’s likely effect on jobs and the economy? My hon. Friend raised that matter and I am sure all members of the Committee would be interested to know what the Minister thinks the most likely impact of the measure will be. As he explained, the new measure opens up relief for R and D expenditure to companies with no current corporation tax liability—they will be able to get a cash benefit at the end of the subsequent accounting period subject to the PAYE/NIC cap—and to loss-making SMEs, which should be able to get an element of cash credit for expenditure that they currently have to claim under the large company scheme rules. He said that the Government were responding to issues faced in the consultation. Those are some of the issues that were raised. How many extra companies will be eligible for R and D expenditure relief as a result of this measure and what will be the cost to the Exchequer? How does he expect that to figure in his overall calculation?

Ian Mearns (Labour, Gateshead)

Will my hon. Friend ask the Minister to reflect on whether, with big business in this country sitting on such a huge amount of cash, which could be invested in research and development, it is companies on the margins that will invest money, which they would not otherwise have, through these credits, or are we just providing money that business would automatically invest in research and development anyway, given the amount of funds at the disposal of the large business sector?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend for that intervention. I am sure the Minister will respond in due course. It is important to recognise that some businesses are potentially sitting on pots of cash. They are concerned about what the future will hold and are perhaps not investing as much as they might in a whole range of ways. We want to see businesses invest, particularly with a view to creating jobs and increasing growth. Businesses need to recognise the value of R and D. If we can encourage them to spend on that and to improve both their products and their productivity, that will be very important for job creation.

Fiona O'Donnell (Labour, East Lothian)

Just to prove that we Scots can never be accused of being parochial, would my hon. Friend also ask the Minister what discussions he has had with other Government Departments, particularly the Department of Energy and Climate Change, about opportunities in green growth, jobs and investment? Britain is sadly falling down the league table.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Again, I thank my hon. Friend for that intervention. I am sure that the Minister will want to speak for himself and the Government on that point when he seeks inspiration to answer in detail the ever increasing list of questions that have been posed. It would be interesting to hear what recent discussion has taken place about so-called green jobs and renewable technologies. At one stage the Government wanted to suggest that they would be the greenest Government ever. That claim has perhaps disappeared from the agenda. There is certainly not much evidence to suggest that that is a credible claim now. Again, I am sure that the Minister will wish to pick this up.

I return to the point I was making about the measures that have been proposed and the Government amendments. As the Minister will know, concerns were raised during the consultation rounds about companies undertaking sub-contract work being disadvantaged by some of the proposals, as the credits would have to be deducted when calculating prices for Government non-competitive contracts. The Government have countered that by stating that the issue will be addressed by the single source regulations office, which will be tasked with amending and overseeing single source pricing regulations. Can the Minister address that? As I said earlier, there is a growing list of technical questions and policy issues for him to respond to in his summing up. Can he update the Committee on the progress made in setting up that office and his plans for the work it will do to address that specific problem? Also, what assurances can the Government give to affected companies that they will not be overly disadvantaged before the single source regulations office is set up and running?

Concerns were also raised during the consultation rounds about the complexity of the accounting, including the incorporation of some relatively complicated offset rules. What advice or guidance has been issued to the industry on those changes and does the Minister plan to provide any further guidance, especially once the above-the-line credit becomes mandatory on 1 April 2016? The Government’s impact note on the clause states:

“There will be some additional costs in terms of revised guidance and business support. Due to the nature of this particular change, the Company Tax return CT600 will also require some design alteration.”

Bearing in mind the questions raised by my hon. Friend the Member for East Lothian about businesses understanding what is available and being fully up to speed with the opportunities that might be available, it is important for the Government, if there are complexities or issues to be ironed out before the scheme becomes fully operational, to give some steer at this point as to how they intend to take the matter forward. Can the Minister confirm what assessment he has made of the additional costs referred to in the impact note? Can he also say a little more about what business support will be offered?

Fiona O'Donnell (Labour, East Lothian)

Can my hon. Friend add to the list of questions whether the Minister will spell out what mechanisms will be used at local level to deliver information to businesses, given that the Government are undermining enterprise support in local council areas?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am sure the Minister has heard my hon. Friend’s question. I think we must be up to about 10 questions on which the Minister will have to give us information. My hon. Friend makes an important point about what happens at local level.

The impact note states:

“The measure will be kept under review through regular communication with affected taxpayer groups.”

Can the Minister elaborate on what form that review will take? Committee members will have heard me say that I am always wary when Ministers, often as inspiration strikes them during the debate, say that everything is under review all the time. As I have mentioned before, that does not mean anything if it is under review sitting on a shelf somewhere, waiting for someone to come up with a solution. The Minister might want to illuminate us as to how the matter will be kept under review. What action will be taken? Who will be consulted? How will the regular communication be taken forward? Who are the affected taxpayer groups? How will the Government engage with business? When will we get some indication of what changes might be made and what further policies might be developed in response to the review? How will the people who are interested in the matter be able to continue to look at it once the Committee completes its proceedings and we move on to deal with other things?

James Duddridge (Conservative, Rochford and Southend East)

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

This debate illustrates an issue with the Budget. Too many of my constituents think that the Budget is a single-day process that happens and then goes away. Although clause 34 will not be on the front pages of TheMail, TheExpress, or indeed the Southend Echo tomorrow, it is an important part of the whole process. Sometimes it is the technical detail that will get Britain back to work. It is an important part of the growth strategy. Just because it is a bit techy and complex does not mean that it is not incredibly important.

For whatever reason, certain companies look at profit before tax, particularly in looking at business on an ongoing performance basis. That is sensible. If a company has a management team in the US, in Asia and in Southend, it would be unfair to compare its performance in the UK, where it may receive advantageous tax treatment, with that in other tax entities. However, this proposal has an ongoing impact that could make the UK look more favourable. The change between above the line and below the line will certainly assist. Providing a credit or grant above the line is certainly welcome.

Comment has been made about the time it has taken to implement the policy. I would suggest that it is better to take the time and get it right rather than have it unravel. QinetiQ, a company in my constituency, said that the process has been exceptional and commended not only the Minister but his team of officials for their work. It also said that it had a high degree of confidence. It is important to get the policy right for QinetiQ. If it is not in the top 10 of R and D spend in the UK, it is certainly not far off it.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hear what the hon. Gentleman is saying and I know the company that he is referring to. Does he agree that, having established a good working relationship with industry, further review and ongoing communication and discussion on whether the policy is working in practice are particularly important?

James Duddridge (Conservative, Rochford and Southend East)

I do not want to get too het up on terminology. The Government should always be open to review. The hon. Lady is making it sound as if putting the policy under a slightly more formal review would be a good thing, but it has a cost. Her suggestion argues against the case she was making about long-term tax certainty. The Government should always be open if things have not quite worked out and come back and fine-tune legislation, but I do not see the need to formalise that process. I would be horrified if the Minister leapt to his feet and said, “Yes, we should review this, and we will have a little task force doing it every six months.” People would look back and ask, “Why are we doing this?” and the answer would be, “Way back in 2013, a point was made about reviews, so it was formalised.” I was exaggerating, but I find the words of reassurance sufficient in the context of what has been called an exceptional relationship with the Minister and his team.

The policy is not just about getting new business into the UK, but about retaining existing business. QinetiQ talked to me about its E-X-Drive, a transmission mechanism used in military vehicles. It is quite exceptional technology that the US buys from a UK company; it does so because the technology is the best in the world. More than 35 people are employed directly in R and D, providing the technology to military equipment. Those jobs are constantly under the pressure to move away. These changes will make sure that those jobs remain in the United Kingdom.

On a broader point, R and D expenditure and development and projects are quite often looked at over a period of 10, 15 or 20 years. I have some concerns about the projects that have had tax structures and arrangements set up in the past, looking forward over a 10, 15 or 20-year period.

I note that in part 3 of the Bill there is an arrangement by which companies can use the existing tax treatment up to 1 April 2016. Will the Minister put some meat on the bones of what will happen on that date, to confirm that that is still right? Out of curiosity—this is not desperately relevant—will he also tell us why that arrangement is for 1 April rather than 4 April? I would have thought that 4 April would have been easier in terms of everyone’s tax treatment, but, as a non-accountant, I am sure that there are good reasons.

In concluding my remarks, while not relevant to the points I made here, I draw Members’ attention to my entry in the Register of Members’ Financial Interests, as I serve a small but growing financial services company in Liverpool.

Steven Baker (Conservative, Wycombe)

I wish to make two points. Without wanting to be unhelpful, I observe that paragraph 37 of the explanatory notes states:

“The ATL credit will be a taxable receipt and will be paid net of tax to companies with no corporation tax liability.”

I ask the Minister, in this era of deficit spending, where will the money come from? I am sure that, with the Government closing loopholes elsewhere, there must be a good idea of that.

The other point is, in relation to the clause, a lot was said by Opposition Members about holdings of cash, and also about certainty. My hon. Friend spoke about projects that run for 15 to 20 years and one of the reasons why large companies hold on to cash, the most liquid asset, is to deal with uncertainty. I ask the Government to make sure that long-term certainty is assured in this measure.

Marcus Jones (Conservative, Nuneaton)

I agree with my hon. Friend the Member for Rochford and Southend East that these types of measures are not necessarily those that catch people’s eyes on Budget day; they are more pre-occupied with fuel duty, beer duty and all the simple measures that we all notice as consumers. However, this measure, which the Government are pursuing, is extremely important and the Minister knows that I have advocated it for some time.

The measure is extremely important for my constituency, where many work in the motor manufacturing industry and have done traditionally. When we look back at the history of that industry, whose demise was gradual, we can see that the root causes included the poor management of many of those companies; the poor industrial relations and militant unions that we had over many years; and the severe lack of research and development funding, which meant that companies were churning out car models that people did not want to buy. We were overtaken by companies from abroad who invested substantially in research and development and modernised their models continually. The British public, and the public around the world, wanted to buy those models and we fell behind.

That is why this measure is so important. The resurgence of the motor manufacturing industry, particularly in Warwickshire and the west midlands with companies such as Jaguar Land Rover, has been driven by the investment in research and development in the last few years. The number of jobs created in that region under this Government, supporting companies such as Jaguar Land Rover with this type of measure, has been phenomenal. That is also having a positive effect on small and medium-sized enterprises in constituencies such as mine, which are now expanding at some pace to meet the demand in the supply chain from companies such as JLR.

The Government have been right to take their time over implementing this policy and to engage with industry and speak to all those who may be affected. Not all those companies were positive about this measure, but it seems that the Government have been able to work with them. Companies such as those in the defence sector now seem to be comfortable with what is happening. That is important because Governments of all colours are often criticised for bringing in policies that affect industry with little notice or thought. That is the perception of business.

It is, therefore, important that before any measure such as this is put in place, business is fully consulted and the implications of the policy are known by Government. I commend the Minister and the Treasury team who have done that with this policy and have brought the measure forward. I am sure that the measure will create many thousands of jobs over the next few years, not just in Warwickshire and the wider west midlands area but across the country.

David Gauke (Conservative, South West Hertfordshire)

I thank members of the Committee who have spoken in support of the measure. I am delighted that there is consensus that this is the right step forward. R and D tax credit proposals should be put in the context of various measures that we are taking as a Government to make the UK tax system more competitive. That includes, of course, the cutting of the main rate of corporation tax from 28% to 20% by April 2015; the introduction of the patent box with the reduced 10% rate of corporation tax on profits arising from patents; and the introduction of competitive new tax reliefs for animation, high-end television and video games industries.

It is important that the UK is able to compete. It is important that the UK is a destination of choice for companies that can choose to invest in a number of locations. R and D tax credits fall into line with that approach. The reforms that we are making are designed to support long-term growth and productivity through the development of new skills, technologies and processes in the UK economy. I am pleased that that has the Committee’s support.

My hon. Friend the Member for Wycombe raised the point that some cases will involve an amount being paid even though there is no corporation tax liability. He asked where the money comes from. The ATL credit is designed to be more effective at influencing large company investment decisions and to provide better value for money to the Exchequer. The ATL will increase the cost of the relief by around £350 million a year. However, in ensuring that it is paid out whether a company is making a profit or not, it will provide a degree of certainty to businesses, which will know that when they make an investment decision in an area involving R and D expenditure they will benefit from this approach. We believe that will support long-term growth and productivity and make the UK a more internationally competitive location for innovation.

I will respond to the point raised by the hon. Member for Gateshead about whether the measure is cost-effective. It is worth pointing out that R and D relief is designed to address a number of risks and market failures that cause firms to under-invest in research and development. Costings assume, in line with empirical evidence, that £1 of R and D relief translates into £1 of additional R and D investment. There are then positive spillovers of skills, technologies and processes across the economy that are not included within the costing but would clearly help benefit the UK economy.

We have to remember when we talk about businesses having large sums of cash reserves that they can choose to invest, that they can choose to invest in a number of different countries. The Government want to do everything we can to encourage that investment in the UK.

Ian Mearns (Labour, Gateshead)

I understand the point being made. AkzoNobel, the largest private sector employer in my constituency, has its international research and development division for marine paints at Felling in Gateshead and, of course, it is important that that multinational business carries on its function. It is doing some exciting work with local universities and attracting graduates into its research and development function. However, I am wondering how much more it will be doing as a result of the measure.

David Gauke (Conservative, South West Hertfordshire)

As I said a moment ago, the evidence that we have analysed suggests that £1 of tax relief results in an additional £1 of R and D investment, with additional spillover effects to the advantage of the UK economy. It is also worth pointing out that a lot of R and D investment in the UK may be made where there is no corporation tax liability because the companies can be capital-intensive, operate in cyclical industries or have long product development cycles. The ATL credit will provide greater financial and cash-flow support to those companies, making the UK a more competitive location for them to invest in R and D, and bring products and technology to the market.

As for reviews and so on, it is important that we have certainty and stability within the regime. We are talking about investment decisions made for the long term, which is why it is important for the regime to be correct, and why it is right that we have a proper consultation process and ensure that we bring matters into place in a way that is sustainable. I am grateful for the remarks about the consultation process. We certainly have engaged heavily with businesses, which is the right thing for Governments to do in such circumstances. We will, of course, keep R and D relief under review to ensure that it is effective, and that it is incentivising private sector R and D investment and providing value for money to the Exchequer.

The Treasury and HMRC hold regular working groups and consultative committees to look into the concerns of interested parties and inform policy debate, and I am sure that such meetings will continue to be held at forthcoming fiscal events. I agree with my hon. Friend the Member for Rochford and Southend East that formalising a review process in such circumstances would be unnecessary. I fear that the Opposition have perhaps missed an opportunity to table an amendment requiring a formal review, as that theme has been running through our debates. However, I am sure that it is not too late for such a request to be tabled for our discussions on Report. We shall wait to hear. Perhaps there is an iron discipline—

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a new regime.

David Gauke (Conservative, South West Hertfordshire)

It is a new dawn for the Opposition, and how refreshing that is.

Ian Mearns (Labour, Gateshead)

If we table an amendment, I am sure that we can quote the Minister and say what a good idea he thought such a process was.

David Gauke (Conservative, South West Hertfordshire)

That would be a selective quotation.

Of course, we keep such matters under review, but what we have put in place is a regime that should provide some long-term certainty, which is why we have implemented it in such a manner. I shall refer to defence contractors in a moment or so.

I now wish to provide a little more information about the beneficiaries of the regime. As I said in my opening remarks, there are about 2,450 claimants of large company R and D relief. About 50% of those companies are assumed to have no corporation tax liability, either temporarily or permanently. The ATL credit will increase the cost of R and D relief by around £350 million a year.

National Statistics records information relating to R and D claims for businesses in Scotland. In 2010-11, there were 135 claimants of large company R and D relief, which was worth £19 million. Those companies will benefit from a more visible, certain and effective form of R and D relief that is payable in the absence of corporation tax liability.

The Treasury is working closely with the Department for Business, Innovation and Skills and UK Trade and Investment to increase awareness of UK R and D relief. HMRC and BIS have held a number of joint workshops to raise awareness of the relief and HMRC has also attended events organised by UKTI to promote R and D relief. HMRC guidance will be published shortly to assist businesses claiming the credit. It is merely the mechanism for claiming that has changed; the underlying rules have not. Guidance on how to complete the relevant form—the CT600—has been provided in the guide that accompanies it, and HMRC has a number of specialist units that can assist businesses in making their R and D claims. When R and D tax credits were first brought in, businesses raised a number of concerns about how difficult the process of making claims was. To be fair to HMRC, specialist teams were brought in during the previous Parliament and the process was substantially improved; the complaints that we heard about in 2005 and 2006 had dissipated by 2010. HMRC has a record of effective implementation in these matters.

There is also the issue of what more we can do to publicise the steps that we have been taking. I am sure that when visiting businesses in their constituencies all members of the Committee will want to point out the many things the Government have done to improve the competitiveness of our tax system, such as the patent box, R and D tax credits and the cuts in corporation tax. I am sure we can all be ambassadors for the tax competitiveness of the UK economy as it currently stands. I look forward to hearing many reports of hon. Members visiting businesses in their constituencies and informing them of the measures that we are taking.

It is of course also the case that professional advisers will be well aware of the measures. Looking at this particular measure, which applies to large businesses, there should be considerable awareness of the opportunities with R and D tax credits.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I shall resist the temptation to ask the Minister how many times he put his name to amendments that suggested reviews when he was in opposition. I have a serious question for him, which relates to the point raised by my hon. Friend the Member for East Lothian, about Scotland, and how Scottish Enterprise links to HMRC, BIS and UKTI. Is he aware of any specific initiatives in that context to ensure that Scottish Enterprise and UKTI are able to promote these measures and that there is ongoing take-up in Scotland?

David Gauke (Conservative, South West Hertfordshire)

I can certainly take the hon. Lady’s comments on board, and ensure that Scottish Enterprise is fully informed—as I am sure it already is—of the measures in the clause, as part of our attempts to ensure that businesses are well aware of the steps that we have taken to make the United Kingdom an attractive regime for business investment.

The single source regulations office has been raised on both sides of the Committee, particularly in the context of companies whose R and D relates to contracts with the Ministry of Defence. The Government believe that the treatment of R and D relief in the pricing of MOD single-source contracts is a matter of procurement policy and should be reviewed on its merits, as part of the MOD’s response to the Currie review. The SSRO, an independent body due to be set up in 2014-15 by the MOD, will conduct a review to amend and oversee the MOD’s single-source pricing regulations. Following consultation with the MOD and industry, the SSRO will make a recommendation on the fair and reasonable treatment of R and D relief in the pricing of MOD single-source contracts. Consequential amendments to the single source pricing regulations are expected to take effect from April 2016. Companies will continue to claim R and D relief via the existing super deduction until that point.

In that context, I shall address the question that my hon. Friend the Member for Rochford and Southend East raised about what will happen in 2016. The legislation ensures that only the credit can be claimed from 1 April 2016. From that date, companies will make their R and D claims using the expenditure credit rules. Why is it 1 April rather than any other date? Good question. That is the date from which corporation tax is chargeable for a financial year. I thank my hon. Friend the Member for Nuneaton. He has campaigned vigorously, representing the interests of his constituency and the wider west midlands. He made representations in advance of the Budget about where the R and D above-the-line rate should be. We had indicated that 9.1% was the likely rate; he advocated a 10% rate as being more appropriate, and his representations have borne fruit. I am grateful to him for being a doughty champion of industry in his constituency and the wider area.

I hope I have managed to address the questions that hon. Members have raised. I am grateful for the support that our approach has won.

Schedule 14 - R&D expenditure credits

Clause 35 - Relief for television production and video games development

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss the following:

That schedule 15 be the Fifteenth schedule to the Bill.

Government amendments 39 to 45.

That schedule 16 be the Sixteenth schedule to the Bill.

Government amendments 46 to 49.

That schedule 17 be the Seventeenth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 35 and schedules 15 to 17 introduce the new corporation tax reliefs for companies producing animation, high-end television and video games. The tax reliefs will play an important role in enabling companies in those creative industries to continue to make their valuable economic and cultural contributions to the UK as part of a dynamic and diversified economy.

Before I set out the detail of the clause and schedules, I shall provide hon. Members with some background to the Government’s decision to introduce such tax reliefs. The UK is a world leader in these industries, with a strong reputation for high-quality work and for the talent and skill of its work force. We are taking steps to ensure that remains the case in the future.

These are highly skilled, innovative and export-oriented sectors, but they are also highly mobile. Without Government intervention, there is a risk that under-investment in these industries will result in valuable productions moving overseas or not being made at all. It is also the case that, in contrast to a growing number of countries who offer targeted incentives, the UK can be seen as uncompetitive by companies operating in these industries. We intend to address that.

Clause 35 and schedules 15 to 17 will enable existing animation, high-end television and video games production to remain in the United Kingdom, and will also encourage inward investment. The changes made by clause 35 and schedules 15 to 17 will benefit hundreds of UK companies involved in producing animation, high-end television and video games. They will benefit companies across the UK, from video games developers in Dundee and east London to animators and television producers in Bristol, Manchester and Northern Ireland. These new reliefs are forecast to provide over £100 million of support for these industries by the end of the scorecard period in 2017-18.

Let me explain how these tax reliefs will work. These new creative sector tax reliefs are modelled on the existing film tax relief, which provided more than £200 million of support to 320 British films in 2011-12. The new reliefs will benefit companies involved directly in the making of qualifying animated or high-end television programmes or video games. Companies will be eligible for a payable tax credit worth up to 25% of qualifying production expenditure, which equates to an effective 20% rate across the total production budget. That will ensure that they are competitive with incentives available elsewhere in the world.

Like the film tax relief, productions will need to be certified as culturally British by passing a cultural test or be made under an official co-production treaty in order to be eligible for relief. The cultural test application is straightforward for companies, and will be administered by the British Film Institute, which already administers the film tax relief cultural test on behalf of the Department for Culture, Media and Sport.

Like the film tax relief, these new creative sector tax reliefs require state aid approval from the European Commission before they can be implemented. The animation and high-end television tax reliefs were cleared at the end of March. They will commence as planned on 1 April 2013.

As confirmed at Budget 2013, the video games tax relief will be introduced following state aid approval. Since then the Commission has taken the decision to open a formal investigation into the scheme. The process for, and duration of, the Commission’s investigation are determined by the Commission itself. Nevertheless, the Government are working closely with industry to provide the Commission with the evidence it needs to conclude its investigation as quickly as possible.

James Duddridge (Conservative, Rochford and Southend East)

I thank the Minister for providing the draft statutory instruments. Perhaps this will go straight on to the Department for Culture, Media and Sport, but what consideration have the Government given to reviewing and simplifying for animation the template that is used for films? I have read through the proposed statutory instrument, and it is almost a satirical farce. Points are awarded if three characters are from the UK; if the lead character is from the UK there is one extra point. It is almost as if it is a political satire. I appreciate that this is not about tax treatment, but perhaps there is an opportunity to review some of the historical, cultural tests for films as well as for animation.

David Gauke (Conservative, South West Hertfordshire)

I fully appreciate the concern that my hon. Friend raised. We should always seek to simplify matters as much as possible. To a large extent, we are constrained by having to ensure that the rules satisfy the constraints on state aid, which means that there is a need to take into account cultural tests. It is also fair to say that the revised film tax relief system, as opposed to its earliest form, appears to have been successful. It is widely used and has contributed to a thriving film industry.

Truth be told, minimising complexity and ensuring straightforward compliance was a central consideration in designing these reliefs. That is why we are basing the new reliefs on the existing regime that applies for film tax credits, which is successful and well understood. We have worked closely with industry in determining the design of the reliefs, to ensure that they work for their specific working practices. Officials continue to engage with industry by, for example, attending events to help and advise in the run-up to companies making claims. Ultimately, detailed guidance will be published on the HMRC and British Film Institute websites, to ensure that companies get the support that they need.

It may help if I outline the extensive, productive consultation on the design of the tax reliefs. The Government’s main consultation on the design of the new tax reliefs took place over summer last year. There were 54 responses from interested parties. The Department for Culture, Media and Sport also conducted a shorter, separate consultation, during October, on the design of the cultural test. There has been constructive, positive engagement with businesses of all sizes during the consultations, including significant input from industry representative bodies and professional groups. That has ensured that the reliefs are designed to work effectively in a way that fits with the specific working practices of each industry, meaning that our final proposals have been widely welcomed. Furthermore, as a direct result of concerns being expressed by interested parties during the consultation, the Government have taken steps to ensure that sufficient investment is made in skills development in the sectors, covered by the creative sector tax reliefs.

Jim Shannon (DUP, Strangford)

The Minister has mentioned the advantages for all Administrations, including the Northern Ireland Assembly, the Scottish Parliament and the Welsh Assembly. What discussions have the Government had with the Northern Ireland Assembly, for example, in relation to the creative industries and the film industry in particular? In Northern Ireland we have a growth industry. Lots of jobs have been created and there have been lots of opportunities. Money has been spent and investment has gone in from private enterprises as well. I am keen to ensure that the Northern Ireland Assembly Administration has input into Government policy and works together with the Government.

David Gauke (Conservative, South West Hertfordshire)

There has been an extensive consultation programme. I know, from personal experience, that the First Minister and Deputy First Minister have a close interest in this area. I am not sure that I can provide the hon. Gentleman with details of the correspondence at this point, but I have no reason to believe that there has not been proper engagement with the devolved Administrations. I am well aware that the Northern Ireland Administration have taken a close interest in this area. We have certainly been engaged with them. Representatives of the devolved Administrations have been in touch with Treasury and HMRC officials. There was Northern Irish involvement in the working group that has participated in the process. I hope that that provides the hon. Gentleman with some reassurance.

We have reflected and responded to representations that we have received. In the autumn statement last year we announced £6 million match funding for skills development in these sectors over the next two years. That was extended to £16 million in the recent Budget. In addition, the Government are keen to explore options to provide further support for the visual effects industry through the tax system; a public consultation on the subject was launched in April.

Schedule 15 introduces new tax reliefs for animation and high-end television production. It enables qualifying companies engaged in the production of animation and high-end television programmes intended for release to the general public to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit.

Stephen Doughty (Labour, Cardiff South and Penarth)

The Minister will be aware of my interest in such matters given that, although we do not know who the next Doctor will be, we can be pretty sure that he will regenerate in Cardiff bay. What does the Minister mean by “high-end television”? I certainly consider “Doctor Who” and other Cardiff-based productions to be in that category, and I have noted the many exemptions listed in the Bill for what is not covered by tax relief. Will he give us a bit more detail on what is meant by “high-end” and what productions would benefit from such relief?

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the hon. Gentleman for raising his constituency issue, which is closely supported by the Gauke household, where there is great interest in who the next Doctor Who may be.

Ian Mearns (Labour, Gateshead)

Is the Minister making a bid?

David Gauke (Conservative, South West Hertfordshire)

Who would want to miss out on the excitement of Finance Bills in order to deal with Daleks, Cybermen and what have you? Perhaps I should not explore that point—[ Laughter. ] To answer the question, the definition of high-end television is based on the cost-per-hour of production, which deals with the more expensive television productions. I am not able to confirm whether “Doctor Who” falls within that category, but I suspect that it probably does. The measure should be helpful to the creative sector, and the hon. Gentleman is right to suggest that it would be significant for Cardiff.

Both the additional deduction and the payable credit are calculated on the basis of UK core expenditure up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company’s qualifying expenditure on the production of a qualifying animation or high-end television programme, of which at least 25% of the qualifying expenditure must be on goods or services used or consumed in the UK. The animation or high-end television programme must be certified as a culturally British product to qualify for the tax credit.

Schedule 16 introduces a new video games development relief. As with schedule 15, it will enable eligible companies engaged in the production of qualifying video games intended for supply to the general public to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit.

Nigel Mills (Conservative, Amber Valley)

This may be a naive question, but I could not find a definition of “video game” in the provisions. Are we just talking about games for the Xbox or similar or will an app on an iPad or iPhone count?

David Gauke (Conservative, South West Hertfordshire)

It is a question of meeting certain requirements, rather than a game necessarily having to be on the Xbox.

Nigel Mills (Conservative, Amber Valley)

Other consoles are available.

David Gauke (Conservative, South West Hertfordshire)

Indeed. All platforms are covered, which includes whether a game is boxed, online or an app. I hope that that provides some clarification.

Fiona O'Donnell (Labour, East Lothian)

I wonder whether the Minister would take this opportunity to say whether he regrets that the Government did not act sooner to support the sector and to take forward the commitment that was in the Labour party’s manifesto. Not doing so has damaged the sector in cities such as Dundee.

David Gauke (Conservative, South West Hertfordshire)

We did look closely at the evidence and, if truth be told, the evidence for a video games tax relief has grown stronger over the course of this Parliament. We looked at the evidence and decided to proceed with video games tax relief. That will be of particular benefit to Dundee, which is strong in the sector, and we hope that it will go from strength to strength. If I remember correctly, the Scottish Affairs Committee looked at the issue in 2011 and did not actually recommend going forward with a video games tax relief. I am sure that the hon. Lady will correct me if I am wrong, because she was a member of that Committee at the time.

Ian Mearns (Labour, Gateshead)

I have an interest inasmuch as in my constituency, Gateshead, there is a video games company called Eutechnyx, which is thriving, but could be doing even better. It is very much involved in the international market. The video games industry is not unique, but it is certainly niche in that it generates international competition that is easily moveable. I really think that the Minister should think again about the issue because the market in which companies are operating is so fluid.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman underlines why we want to proceed with video games tax relief. He is right that there is international competition—for example, Canada has a very generous tax regime for the sector. There is a risk that UK business could be lost. That is why we have introduced schedule 16, within which the additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company’s qualifying expenditure on the production of a qualifying video game, for which at least 25% of qualifying expenditure must be on goods or services used or consumed in the UK. The game must be certified as a culturally British product to qualify for the tax credits.

Fiona O'Donnell (Labour, East Lothian)

I apologise to the Minister that I was unable to get to my feet to respond sooner. As the hon. Member for Warrington South—who passed the Minister a note—well remembers, because he was also a member of the Scottish Affairs Committee, I voiced concerns at the time about the recommendations of that Committee report, and I think that the Scottish Affairs Committee would now agree that on that occasion it got it wrong.

David Gauke (Conservative, South West Hertfordshire)

I stand corrected. I am not a member of the Scottish Affairs Committee; that is something that I aspire to almost as much as becoming the next Doctor Who—[ Laughter. ] If the hon. Lady is telling me that the Committee recommended against a video games tax relief but she was in favour, I will take that.

Fiona O'Donnell (Labour, East Lothian)

Given that time travel back to the time of that report is not quite possible for the Minister—yet—I was saying that he got it right about the Committee’s report, but that the Committee got its recommendations wrong.

David Gauke (Conservative, South West Hertfordshire)

I take that. She is right to detect that my hon. Friend the Member for Warrington South, who had the privilege of being a member of that Committee at the time, was suggesting that that was the case. I do not think that there were any minority reports or divisions on the matter. I am not sure where the Scottish Affairs Committee finally stood on the issue, but I note her points.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I do not wish to return to the Scottish Affairs Committee, although I was also a member of that Committee at that time. I want to return to the Minister’s point on the draft regulations and the cultural test. The draft regulations state:

“The cultural tests do not stipulate content, location of production, or selection of practitioners, but the tests do ask for a reasonable amount of production activity”.

I worry when we have terms like “a reasonable amount”. Will the Minister give some indication of what is “a reasonable amount” of production activity taking place in the UK for something to qualify as British?

David Gauke (Conservative, South West Hertfordshire)

The hon. Lady will be aware that we need to ensure that we comply with the requirements on state aid. There are cultural tests within that that we need to comply with. It is worth pointing out that the film tax relief requires a production to pass a cultural test to be eligible, and that has not stopped an effective scheme from operating. We do not expect that the cultural tests will stop the schemes being effective with the new creative sector tax reliefs.

As for the specific requirements for how much activity should occur within the UK, it would be fair to say that it is difficult to nail down a definition of “reasonable amount” for these purposes. The game must be certified as a culturally British product to qualify for the tax credit, and part of that relates to activity in the UK. I am not sure that we can be too specific about that at this point.

Schedule 17 introduces consequential amendments to other parts of the Tax Acts relating to the introduction of the new reliefs.

As for the future changes, an animation, high-end television programme or video game must be certified as culturally British to be eligible for tax relief. Schedules 15 and 16 include a power to introduce points-based cultural tests for each new relief. Those tests will help determine whether a programme or video game may be certified as culturally British by the Secretary of State for Culture, Media and Sport. A statutory instrument will be introduced through the negative procedure immediately after the Bill receives Royal Assent. As we have already heard from my hon. Friend the Member for Rochford and Southend East, who, as ever, is assiduous, a draft of the statutory instrument has been provided to the House. We will keep the new relief under review alongside other measures in the Government’s package of corporate tax reforms to ensure that businesses are benefiting in the way we intended and that the new regimes are not being exploited for tax avoidance or fraudulent purposes.

Nigel Mills (Conservative, Amber Valley)

I have a quick question about the definition of video games, which excludes anything produced for advertising or promotional purposes. The Minister may not be aware that some downloaded games are free, but occasionally have an advert popping up. I guess that that is how they make the revenue to justify the game, but will that mean that the game does not qualify for the relief? Is it a balance of things? If the whole game is not designed as an advert for one person from the start, but has a series of small and occasional adverts, would that be okay? It would be helpful to have clarity on how the rules will be interpreted.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes a detailed point. I may address that particular concern before I sit down or perhaps later in these proceedings. No, let us not beat about the bush; I shall turn to this important issue. I say to him that the game itself will qualify, but the expenditure on the adverts themselves will not qualify. I hope that that provides clarity on that question.

Returning to Government amendments 39 to 49, in light of the ongoing Commission investigation, the amendment that we are discussing now provides the Government with limited powers to update schedule 16 of clause 35 to reflect any changes needed to ensure that video games tax relief is compliant with state aid rules. It will also ensure that the Government are in a position to legislate on changes at the earliest opportunity. Without it, businesses and investors would need to wait for legislation to progress through the next Finance Bill. It will therefore prevent any such uncertainty, and it underlines the Government’s commitment to introduce the relief as quickly as possible.

In conclusion, the new creative sector tax reliefs will help to maintain the UK’s position as a world leader in producing animation, high-end television and video games, encouraging investment and promoting long-term sustainability within those industries. I hope that the clause and schedules can stand part of the Bill.

Stephen Doughty (Labour, Cardiff South and Penarth)

I just want to ask the Minister one final question. I am a member of the Performance Alliance here in Parliament and I attended a reception that it organised before Christmas. There were many representatives there from the video games industry. They will undoubtedly welcome the support for the industry that is being proposed here. However, one of their concerns was the very low rates of pay, particularly for some of the contributors to video games, especially those in composing and other activities, who are often asked to work for free. Does he hope that the expansion of this industry in the UK will also see an expansion in the compensation provided to the contributors to the industry?

David Gauke (Conservative, South West Hertfordshire)

What I would say in response to that question is that, as I mentioned earlier, we are also providing match funding to improve skills and so on, and the purpose behind these tax reliefs is to ensure that we have thriving industries. As we have heard, these creative industries can be very mobile industries, they rely on skilled individuals and these are sectors that could potentially become much larger; they are already significant, but they could become much larger during the years ahead.

Indeed, the UK already has a strong reputation in all of these sectors, including animation; I am minded to repeat the line about Wallace and Gromit that the Chancellor used in the Budget 2012 speech. However, whether it be the video games industry—we have already heard about the strength of that industry in Dundee and elsewhere—or the high-end television sector—the hon. Gentleman has provided an example from his own constituency about that sector—these are important sectors and we want them to flourish. Of course, that would benefit those individuals working in those sectors, resulting in stronger pay and a thriving sector.

I hope that the clause and these schedules can stand part of the Bill.

Steven Baker (Conservative, Wycombe)

This clause will stand for ever as a magnificent rebuff to all those in Opposition who have said that this is a laissez-faire, liberal Government. [ Laughter. ] At the beginning of this Parliament, a number of Opposition Members described the Government as Hooverite. I might say that this clause is Hooverite, but only in so far as Opposition Members have misunderstood Hoover’s legacy; he was an interventionist to whom—of course—FDR attributed many of his own policies.

The reason why I bring that up is that this clause seems to be a product of industrial policy, whereby we pick sectors to subsidise, in particular those sectors that seem to have a comparative advantage, and we then give them a tax break to help them along. However, we have to ask who pays? It seems that if we subsidise all those industries with a comparative advantage, those who pay will be those firms that are struggling. It is important to remember that the art of economics is not just to see the short-run consequences of any particular policy on one group but to see the long-run consequences on any group. I find myself wondering if, in due course, we will return to the video games industry and—

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 35 - Relief for television production and video games development

David Crausby (Labour, Bolton North East)

I remind the Committee that with this we are considering:

That schedule 15 be the Fifteenth schedule to the Bill.

Government amendments 39 to 45.

That schedule 16 be the Sixteenth schedule to the Bill.

Government amendments 46 to 49.

That schedule 17 be the Seventeenth schedule to the Bill.

Steven Baker (Conservative, Wycombe)

As I was saying before we went for lunch, there is a danger that we could return in future to the television production and video games development industries and discover that they are larger than they might otherwise have been because of the special privileges they have been granted.

My hon. Friend the Exchequer Secretary will remember that long before I got to this place I worked in a specialist company developing XBRL solutions. A firm such as that, working on electronic financial reporting, with a worldwide reputation, might well wonder why it was suffering a tax disadvantage in order to promote TV production or, more relevantly, video games development.

The clause is very timely because we are in the middle of a lobbying crisis. It is just this kind of special privilege that leads to lobbying, because not only has a privilege been obtained, it is bound to inspire other groups to lobby to obtain similar privileges. It has also created some special interest groups that will lobby in order to retain privileges.

My hon. Friend mentioned the definition of video games. Under paragraph 1 of schedule 15, proposed new subsection 1216AA includes a definition of television programmes. It is thought necessary to say that a television programme

“means any programme (with or without sounds) which…is produced to be seen on television, and…consists of moving or still images or of legible text or of a combination of those things,”

and that television includes the internet.

However, moving forward to paragraph 1 of schedule 16, proposed new subsection 1217AA does not tell us what a video game is. It says that a video game

“does not include…anything produced for advertising or promotional purposes, or…anything produced for the purposes of gambling.”

When I look at that lack of definition on the one hand and the excruciatingly detailed definition on the other, I am inclined to think that it can have been constructed only to meet state aid rules. That leads me to wonder what we are doing.

The hon. Member for Kilmarnock and Loudoun talked earlier about reasonableness. In the 48 pages of these schedules there is a vast amount of detail, a lot of which we have not scrutinised. For example, the excluded programmes under schedule 15 paragraph 1, proposed new subsection 1216AD, are advertisements, current affairs, entertainment shows, competitions, live performances and training programmes.

People in the production industry might well ask why they are to suffer a disadvantage under tax compared with people producing drama and comedy. I have observed that a number of advertisements have been strung together into a number of comedy programmes over time. Have the Government considered whether that might be done again?

With regard to video games, proposed new subsection 1217AD on core expenditure says that

“the following descriptions of expenditure are not to be regarded as core expenditure for the purposes of this Part…any expenditure incurred in debugging a completed video game or carrying out any maintenance in connection with such a video game.”

As a software engineer, I would observe that software is never bug-free. It is also necessary to ask when it is completed. There is an enormous amount of subjectivity in the provision, which could lead to a great degree of fruitless discussion.

The clause seeks honourably enough to support industries in which we have a comparative advantage, but I worry that we are creating special privileges that will have unintended consequences that will be paid for by industries that are doing less well. It will promote lobbying, not just by the affected firms but by others, for example those producing advertising, until everybody has a special tax privilege.

Some would argue that it would make us terribly unpopular to say that these privileges should be taken away, but if we lowered tax rates for everybody and took away the special privileges, I think they would all be rather happier.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am listening with great interest to the hon. Gentleman, who speaks with the benefit of considerable knowledge of the industry. Given the questions he is raising, does he intend to vote for the provisions to stand part of the Bill?

Steven Baker (Conservative, Wycombe)

I get the feeling that Opposition Members do not intend to press the matter to a Division, so I suppose we will have to see what they do. My hon. Friends on the Front Bench know that I never shy away from sticking to my principles on such matters, but I do not intend to force a Division. I am happy to tell the hon. Lady that I foresaw her question during lunch, so I am delighted that she asked. In conclusion—

Ian Mearns (Labour, Gateshead)

Will the hon. Gentleman reflect on the fact that all the other sectors he has talked about that might like such a tax break would not automatically have competition in the international context, but would have such tax breaks locally?

Steven Baker (Conservative, Wycombe)

I am grateful to the hon. Gentleman for reminding me of a point that I wanted to discuss at some length, so as I conclude my opening remarks, I should say that when I hear the argument that international competition justifies some state-imposed benefit, it reminds me of all the old debates about protectionism and free trade. I co-founded the Cobden Centre to argue in various ways for free trade.

We should not say, “Actually, everybody else will have to pay with a tax disadvantage to prop up a couple of industries that we favour.” People should compete freely with one another, wherever they are. I should like, at this point, to insert all the arguments in favour of free trade.

With that, I apologise to the Minister for possibly making his life a little bit more complicated than he was anticipating. I look forward to the day when we have lowered taxes and ceased to grant such special privileges.

Stephen Williams (Liberal Democrat, Bristol West)

I want to make a few remarks, not so much about high-end television, although this morning the hon. Member for Cardiff South and Penarth mentioned Dr Who. The hon. Gentleman caught me on a visit to his constituency at the start of recess, dressed in casual gear. A visit to the Dr Who shop in his constituency was enjoyed and I recommend it to all Committee members.

On the animation industry, the hon. Member for Wycombe said that the genesis of the changes was heavy lobbying. I am one of the people who did that heavy lobbying, as did our coalition colleague the hon. Member for Cities of London and Westminster (Mark Field), whom I mention as he is not a member of the Committee. Bristol and the Cities of London and Westminster are the two major concentrations of the animation industry in the United Kingdom. My constituency will be known primarily for Aardman Animations, the makers of “Wallace and Gromit”. As a free market liberal, I generally agree with the hon. Member for Wycombe that subsidies are not something that the Government should dole out. Government should not pick winners; doing so would replicate the mistakes of the 1970s.

Aardman Animations and all the other animation businesses in the UK are incredibly successful in their own right. Their owners, who are usually the people who made the creative content in the first place, are incredibly innovative. The staff they work with in the UK are highly skilled and trained by our universities. We have the competitive advantage in brain power, but we are losing out on the fiscal international aspect. None of the businesses wants this subsidy from the Treasury. They would rather succeed in their own way, making their own profits from their own intellectual capital. The sad fact is that other countries are awarding subsidies to attract our brain power—our British innovation—to relocate abroad.

There is a cultural aspect, as well as an international tax competition aspect. Many children’s programmes are now being made by overseas cartoon producers, even though they originally had British characters, and this trend will continue if the provisions are not included. I am not a parent—some Committee members are—so I cannot name any of the current cartoons that young people watch. I am of the age of “The Wombles”, “The Clangers”, “Paddington Bear”, and so on. If Committee members imagine “The Wombles” being narrated by a Dutchman or Ivor the Engine speaking with a Canadian accent, that is the cultural danger that we might end up with if the provisions are not included. There are good, British cultural reasons why the tax incentive needs to be introduced. It will ensure that we keep animators and producers of high-quality children’s programming on-shore in the United Kingdom, and that it is a worldwide success. I commend the clause to the Committee.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to be back in the Committee this afternoon, and to follow the interesting contributions of Government Members. Perhaps the most interesting snippet we learned during the course of the morning is that the Minister seems destined for a future career either on the Select Committee on Scottish Affairs or as the new Doctor Who. He found himself unable to choose which would be the most exciting. I leave that for him to ponder, although I am one of those who thinks that it is time for a woman to be the next Doctor Who. Perhaps we will have some more of that campaign. [ Interruption. ]

David Crausby (Labour, Bolton North East)

Order.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I gather I said something extremely controversial. I apologise, Mr Crausby, but we ought to get back to the important and serious business of clause 35, schedules 15 to 17 and Government amendments 39 to 49.

As the Minister said, schedule 15 introduces new tax reliefs for animation and high-end television production, schedule 16 introduces a new relief for video games development, and schedule 17 provides the necessary consequential amendments to existing legislation. All the measures set out separate but targeted corporation tax reliefs for the animation, high-end TV and video games industries to be introduced from April 2013. Both the additional deduction and the payable credit proposed in the measures are calculated on the basis of UK core expenditure up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. For all three new reliefs, the credit is based on the company’s qualifying expenditure on the production of a qualifying animation, high-end TV programme or video game, of which at least 25% must be on goods or services used or consumed in the UK. We have heard about potential difficulties with some of those definitions. It has been helpful that we have seen the draft regulations. I raised some questions with the Minister earlier about them, and I am sure that there will further finessing and refinement.

Government amendments 39 to 44 and 46 to 49 substitute the commencement date for the relief with a specified day to allow for the delay in commencement due to the European Commission investigation into video games. Government amendment 45 allows for a future order to be made by the Treasury amending the schedules to include any conditions imposed on the relief as a result of that investigation.

Hon. Members will be aware that Labour has been supportive of the UK’s creative industries. We recognise the wider cultural and economic benefits that a thriving creative industry can bring to our country and economy. I am glad that the Government recognise the role that Labour in government played in supporting the creative industries. The impact note states that all three reliefs are based on Labour’s successful film tax relief, noting that

“Since its introduction in January 2007, the FTR has supported £5.5 billion of investment into 825 British films which have received approximately £800 million in relief.”

We pledged in our 2010 manifesto to introduce a video games tax credit, as well. I am glad to see that, notwithstanding the difficulties that we have talked about and that were raised during the Scottish Affairs Committee inquiry into the issue, the Government are now being supportive and giving some equivalence to the reliefs that are available in other parts of the creative industries. That is important. A strong argument has certainly been made by various hon. Members, so we welcome the proposed measures.

We can all talk about our own favourite animation programmes. I was filled with horror when the hon. Member for Bristol West described what might have happened if “The Wombles” had been narrated in a different way. My son has reached the age where he is no longer watching such programmes as “Thomas the Tank Engine”, which seemed to be his all-time favourite, whereas for many of my nieces and nephews it was “Bob the Builder”. It is important to recognise that we have produced some extremely—[Interruption.] I think I hear the Soup Dragon being mentioned from a sedentary position behind me. I did not want to admit that I remember that programme. On that point, it is a good time to give way.

Steven Baker (Conservative, Wycombe)

I wonder whether the hon. Lady will move the relevant amendments to the schedules on Report in order to list her preferred targets for subsidy.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I should perhaps have anticipated that question following my earlier point about whether the hon. Gentleman was going to vote with the Government on this issue.

To go back to more serious points, the reliefs are important, because times are tough for the creative industries in exactly the same way as for other industries. Numerous international subsidies have made it difficult for high-end TV and animation companies to compete in the international market, and in recent years there have been concerns about production being moved abroad as a result. I hope that the introduction of the targeted relief will help to reverse that trend and ensure the continued global success of UK high-end TV and animation for many years to come. The impact of the film tax relief shows us the potential of such measures to attract productions and to boost jobs and growth not only in the creative industries but, through the knock-on effect, in the wider economy. I will not go into all the statistics, but figures from the British Film Institute show that in 2008 some 23,000 people were working in film and video production, and by 2011 that number had increased to 39,000. That shows the potential of the proposed measures. Many people who work in the industry have not only campaigned for but made very positive comments about the proposals.

Although it is good news that the high-end TV and animation reliefs have received EC state aid approval, so that they can get to work on building those industries, supporting the jobs and getting the boost that we need from them, there are still issues around the video games tax relief, which the Minister mentioned. When I was a member of the Scottish Affairs Committee, we looked at that industry and we visited Dundee, where my hon. Friend the Member for Dundee East (Stewart Hosie) was involved in trying to ensure that we completely understood the breadth, scale and potential of the video games industry. One of my most striking recollections is of the technical expertise required—describing them as video games is something of a misnomer, and people lack understanding of what is involved. Some of the work that we were shown had had a knock-on effect in areas such as software development and other technology, as well as the wider creative industries. That is very important, so it is good that the Government are introducing this boost for the games industry. The estimate that about 300 video games companies will be eligible shows why it is important to continue that effort.

The Minister talked about the European Commission investigation, but can he outline the state of play with that? Has he recently made any representations to ensure that the investigation is brought to a conclusion? Does he have any idea of the time scale in which that may be done? Do he and the Government plan to do anything else to make the case for the relief? What assessment has he made of the number of jobs that the relief for the video games industry could bring to the UK? We have already heard about the importance of job creation possibilities in the film and television industry. Returning to the points made earlier about definitions, there has been some movement on the draft legislation and the guidance after discussions with industry representatives. Although everything has to be ratified through the European Commission process, is the industry now satisfied that the regulations are shaped in a way that will give it the clarity it requires to take advantage of the relief?

In the impact assessments for each of the reliefs, the Government state:

“Additional resource will have to come out of existing departmental budgets, which may impact on resource allocation elsewhere”

in order for DCMS to administer the necessary cultural test for those reliefs. Can the Minister tell us a little more about that? Where might resources have to be readjusted or recast within DCMS to provide for that work?

John Pugh (Liberal Democrat, Southport)

I have a few observations to make. I am not a great fan of video games, because I think life is too short to engage with them seriously, but I do have constituents who develop them. My feeling is that we were a world leader in this area, because we had a generation of school children who used BBC Micro and Acorn computers before they got into simply working Microsoft applications. In the future, we may no longer be a world leader precisely because IT education has not been spot on over the past few years. We are talking about giving a fiscal incentive—I am very much in favour of what the Government are proposing—but I recollect that we had a fiscal incentive at the start of the coalition period and got rid of it quite quickly, apparently because it opened up the possibility of tax avoidance.

A philosophical objection has been expressed to interfering in the free market. When the hon. Member for Wycombe was speaking about a purist and non-pragmatic view of the free market, I was reminded of the earlier observations about the British motor car industry. I do not want to sing the praises of the Austin Allegro, and clearly any attempt by the British Government to interfere in that industry has been wholly unsuccessful, but if we think that the Japanese did not interfere in their market to great success, we are seriously misleading ourselves. There is scope for Government to encourage the right sort of things through an effective industrial policy.

The philosophical arguments were not the main ones used for rowing back from the progress initially made by the previous Government. Rather, the view was that the incentives would not work or were not needed. The industry protested at the time, suggesting that they were needed and that people would evacuate to Canada unless they were there. I do not know quite what has happened, but there were fears for the industry and expectations of the Government. One thing that we do not do well in Committee or in Parliament in general is recall previous Sessions and the fears expressed about tax legislation and fiscal measures, as well as the hopes that were realised. If there was a drift towards Canada, as seems to have been clocked, a false policy step was taken early on, and a good step is being made now. I cannot help but think that some of the ways we have handled the industry are a consequence of the adversarial tradition of Parliament, where every incoming Government have to change existing policies; in contrast, what industries want is certainty and continuity—something that will be obvious when we vote on renewables later this afternoon.

The Minister might be able to reassure me, but what we need to do with tax reliefs is not only announce them and explain their effects, but undertake research on them to find out what will come to pass many years down the line, after we have all said our piece.

Ben Gummer (Conservative, Ipswich)

I do not doubt the wisdom of the Government’s intentions in the clause, but I have an observation to add to those of my hon. Friend the Member for Wycombe. I accept that high-tech industries are slightly different from those that we are discussing, but there are examples throughout the world of their being developed quickly as a result not of targeted tax subsidies, but of a general low-tax approach and because Government interventions were directed at encouraging venture investment and were not a matter of picking up one particular sector or another. I understand why the Government want to promote the television and games industry, but I hope that that is a sign of their intent to bring all corporate taxation down to the level that they propose in the clause, and a sign of their bravery in seeking lower taxation rates for the years to come.

David Gauke (Conservative, South West Hertfordshire)

I shall respond briefly to this interesting and at times entertaining debate. I was disappointed that my hon. Friend the Member for Southport did not confirm or deny the rumour that two of his uncles were members of the Trumpton fire brigade.

I turn first to the philosophical points made by my hon. Friend the Member for Wycombe, who asked whether the policy was too interventionist and a step away from the approach of allowing resources to be allocated on the basis of the market and so on. He made the case for lower taxes across the board, as did my hon. Friend the Member for Ipswich. It would be fair to say that in what the Government have done in tax reform, the major thrust has been towards lowering rates across the board—for example, a dramatic reduction in corporation tax rates from 28% to 20% by 2015. However, we must acknowledge the existence of specific areas where competition is particularly great and where there is much mobility, as well as other tax regimes that offer competitive rates. Were we to do nothing, we may well see a number of successful UK businesses leave—the hon. Member for Bristol West referred to Aardman Animations, which might have found it impossible to continue to operate in the UK given the other options that were available.

We are ensuring that creative industries continue to make a valuable economic and cultural contribution to the UK, and that the reliefs for animation, high-end television and video games set out under the Bill are targeted and represent good value for money. The film tax relief shows the positive economic effects that such targeted support can have by incentivising greater investment in the industry, which in turn creates jobs and produces revenue for the Exchequer. In 2011-12, the film tax relief supported almost £1.5 billion of investment into more than 300 British films. Since its introduction in 2007, direct employment in the film sector has risen by almost 70%.

Steven Baker (Conservative, Wycombe)

Notwithstanding my hon. Friend’s remarks—I of course understand the pragmatic point about the world that we live in—I wanted to observe that the dominant ideology around the world during this country’s greatest period of industrialisation was once known as liberalism. It was at that time that the Liberal party actually defended liberalism like it meant it.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend draws me into dangerous waters; I will refrain from going there. Like him, I share a strong belief in the benefits of free trade, which is an approach shared throughout most of our politics in this country.

Fiona O'Donnell (Labour, East Lothian)

Does the Minister agree that the hon. Member for Wycombe is perhaps just a bit of a grumpy old Hector, and that his is just an ideological aversion to any kind of intervention by the state?

David Gauke (Conservative, South West Hertfordshire)

I think that my hon. Friend is perfectly entitled to ask such questions, and he raises a perfectly reasonable point. By and large, it is best to take a broad-based approach towards our tax system, but there are particular areas that I would argue require a degree of flexibility because of the mobility and therefore because of the competition. We are looking at one of those areas.

I would like to deal with some of the other questions that have been raised. My hon. Friend the Member for Wycombe asked about the definitions contained in the schedules. The definitions of television and video games are determined by the Office of Parliamentary Counsel; they are not driven so much by state aid, but rather developed to target types of production at risk of moving overseas, about which we have received evidence. Any subjectivity will be clarified in guidance published in September.

With regard to the questions raised by the hon. Member for Kilmarnock and Loudoun about the industry’s response to the legislation and regulations, the industry has been consulted throughout the process and is happy with the current form. Her Majesty’s Revenue and Customs is currently developing guidance with the industry to ensure that it is fit for purpose and easy to understand. My understanding is that the arrangement has been fruitful and constructive.

I was asked about the delay in the commencement of the video games tax relief and the date that it will start. The Government notified the European Commission about video games tax relief in January. The Commission has now decided to open a formal investigation into the new relief. The process for and duration of the Commission’s investigation are determined by the Commission itself. Nevertheless, the Government are working closely with the industry to provide the Commission with the evidence that it needs to conclude its investigation as quickly as possible. Last week, the Government sent a response to the Commission investigation opening letter. Third parties now have until the end of June to submit representations. Details on how to do so are available on the Commission website.

We expect video games tax relief to have a positive impact on job creation and estimate that around 300 companies will benefit from the relief. I point again to the film tax relief to demonstrate the significant potential of such reliefs to create jobs.

Regarding resources in the Department for Culture, Media and Sport and funding for the cultural test administration, we fully intend the administration of the reliefs to be as straightforward and easy as possible for business to operate. The same process as that for the film tax relief, which is well used and liked by users, will be available. Discussions with DCMS with regard to spending are not something that we can necessarily get into great detail here, particularly in the run-up to the spending review, but as I said, the matter is relatively straightforward to administer.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Has the Minister looked in detail at part 4 of the draft regulations, which are about video games? They do not appear to me to be straightforward to administer. People have to accrue a number of points in order to go through the games process analogy and to be able to take advantage of the relief; it takes some degree of reading. What support will be available to the industry to ensure that people understand the policy? In trying to reduce a creative product to something that scores 15 out of 16 points, one may not be using the same mindset that is used in the creative industry.

David Gauke (Conservative, South West Hertfordshire)

I have complete confidence in DCMS to administer the policy. Regarding the rules that will apply to businesses seeking to use the reliefs, as I said, HMRC will publish guidance, which should make the process much easier.

I think that I have covered all the points that I wanted to in response to the debate. I am grateful for the questions and for the probing that the reliefs have received. I believe that they will further strengthen the UK as a place in which to do business. It might be helpful if I end by quoting the president of HBO programming:

“The new financial incentive,”—

for high-end television—

“coupled with UK’s existing reputation for excellence in television production, makes the UK among the most compelling production locations in the global marketplace.”

We believe that that is a prize worth attaining and that the reliefs will play an important role.

Schedule 16 - Tax relief for video games development

Schedule 17 - Television and video games tax relief: consequential

Clause 36 - Health service bodies: exemptions

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The clause is a short, technical one, which ensures that certain health service bodies created by the Health and Social Care Act 2012 will be exempt from corporation tax, as their predecessor bodies were. As I understand it, that would include the new clinical commissioning groups and the three bodies whose status the Act has changed from special health authorities to non-departmental public bodies: the Health and Social Care Information Centre, the NHS Commissioning Board and the National Institute for Health and Care Excellence.

The Minister is well aware of the Opposition’s views on the 2012 Act. I am sure we do not need to repeat debates we had in other places about that Act, although we retain our concerns, particularly those about turning the NHS into a full-blown commercial market and about the danger of putting competition before patient care. The Government’s own estimates have now put the cost of implementing the reforms at some £300 million more than originally planned—the cost will be around £3.5 billion in total. There has been a wide range of criticism from various groups, including the chief executive of the NHS, the British Medical Association, the Royal College of Nursing, the Royal College of General Practitioners, the Patients Association and a long list of many others. It is clear that there are still many concerns about the reforms.

I have no doubt that we could have debated the rights and wrongs of the Government’s reforms to the NHS all day, once again, had that been the proper thing to do, but, as I said, our views are well known. Despite strong opposition both inside Parliament and across the country, that Act is now part of our legislation. However, for the sake of transparency, will the Minister give us his assessment of the cost to the Exchequer of the measure in the clause? On a technical point, will he also confirm, for the record, that the NHS Commissioning Board referred to in the Bill is actually the newly renamed NHS England? I believe there have already been some exchanges on that issue. Is there any likelihood that there could be any confusion, and if so, should there be more formal clarification?

David Gauke (Conservative, South West Hertfordshire)

As we have heard, the clause makes changes to ensure that certain NHS bodies are exempt from corporation tax. I shall provide hon. Members with some brief background to the clause.

The Health and Social Care Bill announced an extensive reorganisation of the structure of the NHS. Among other things, it created new bodies to take over responsibility for commissioning health care. As separate corporate bodies, they would be liable to pay corporation tax. The Health and Social Care Bill also changed the status of two existing special health authorities, making them non-departmental public bodies. Although those two bodies continue to provide the same services as previously, their change in status now makes them liable to corporation tax. The clause exempts all relevant bodies from corporation tax, ensuring that their treatment is consistent with that of all other health service bodies, as well as with the treatment of their predecessor bodies.

The clause provides an exemption from corporation tax for clinical commissioning groups and for three NHS bodies: the NHS Commissioning Board, the Health and Social Care Information Centre and the National Institute for Health and Care Excellence. Those bodies were established either by the National Health Service Act 2006 or by the Health and Social Care Act 2012. The new bodies are not undertaking any activities that are likely to be chargeable; the exemptions, therefore, provide certainty that, despite being bodies corporate, they will not come within the charge to corporation tax for any period.

To answer one of the questions raised by the hon. Lady, I can confirm that there is no cost as a consequence of this measure; as the tax information impact note makes clear, there is a nil impact on the Exchequer. As for her question on whether the NHS Commissioning Board is essentially NHS England, yes, that is correct, but we do not believe that that causes any particular difficulties with the wording of the clause; for legal purposes, there should be clarity there.

I hope that that provides sufficient clarification to the Committee and that the clause may stand part of the Bill.

Clause 37 - Chief constables etc (England and Wales): exemption

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The clause ensures that chief constables and the Commissioner of Police of the Metropolis—the head of the Metropolitan police—created by the Police Reform and Social Responsibility Act 2011, will be exempt from corporation tax. This is a short and technical clause that ensures that those office holders will be exempt from payment of corporation tax, which is detailed in the explanatory notes where they are described as “the new bodies”.

Hon. Members will be aware that the Police Reform and Social Responsibility Act 2011 made significant changes to the structure of policing in England and Wales, specifically by creating police and crime commissioners, the Mayor’s office for policing and crime, and the new bodies just mentioned. Those changes have necessitated the provisions that we are discussing today.

I will not go through all of the reasons why the Opposition did not support that Bill and many of the changes—specifically, the proposals for police and crime commissioners—that the Government brought in, but we are still concerned that the Government appear to be more interested in cutting police officers than cutting crime and we continue to see tinkering and restructuring rather than people on the front line, fighting crime.

We did not support the creation of police and crime commissioners under the Act and we certainly did not support the way in which matters were consequently taken forward. Many people across the country were concerned about the low turnout in the commissioner elections and the cost involved in that; many felt that that money would have been better spent on the front line. However, we are where we are and that Bill passed through the House. In that spirit, it is only right that those bodies receive the same corporation tax exemption as their predecessors, the police authorities.

The explanatory notes state that the police authorities were exempted from corporation tax by virtue of section 984 of the Corporation Tax Act 2010, as they were defined as “local authorities” under section 1130 of that Act. For corporation tax purposes, each of the police and crime commissioners, and the Mayor’s office for policing and crime, could be covered by section 984, but they are not defined as local authorities under section 1130 of the Act and there is therefore a requirement to bring in this provision, specifically to exempt them.

In terms of the assessment that the Minister has made of the total costs, I assume that he will say the same in this instance as he said in relation to the previous clause about exempting these new bodies—the new police and crime commissioners and the Mayor’s office for policing and crime from corporation tax. However, and perhaps more significantly, will he tell us what the plans are for the period ahead to keep the costs of all of those bodies and offices under review? Those groups should get equitable treatment, but there will be some concerns about how they progress in the future. I look forward to hearing what the Minister has to say on that.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the hon. Lady’s support for the clause, which makes changes to ensure that the offices of chief constables in England and Wales and the Commissioner of Police of the Metropolis are not liable to pay corporation tax. The Police Reform and Social Responsibility Act 2011 made substantial changes to the organisation of police forces. It created police and crime commissioners and the Mayor’s Office for Policing and Crime in London. It also had an impact on the existing position of chief constables and the Commissioner of Police of the Metropolis. It made each of them a corporation sole and thus liable to corporation tax on any chargeable activities that they undertake.

The clause exempts chief constables and the Commissioner of Police of the Metropolis from corporation tax. To provide certainty of treatment, the exemption goes back to the respective dates when the bodies came into existence. These bodies are unlikely to undertake any chargeable activities, but not exempting them would create unnecessary administrative burdens for them and for HMRC. Because it is unlikely that they would undertake any chargeable activities, there is negligible cost to the Exchequer here. Were we not to do this. it would have an impact on the implementation of the new policing model, while yielding no tax.

For the sake of clarification, I should make it clear that it is only the corporate bodies that are being made exempt from corporation tax. The Committee can be assured that the chief constables and the Commissioner of Police of the Metropolis will still be personally liable to income tax. I would not want anyone to get the contrary impression. The hon. Lady tempts me into a general discussion on the costs relating to police commissioners, which I will resist. The clause simply ensures that implementation of the new policing model does not give rise to unintended tax consequences.

Clause 38 - Real estate investment trusts: UK REITs which invest in other UK REITs

David Crausby (Labour, Bolton North East)

With this it will be convenient to consider schedule 18 stand part.

Chris Leslie (Labour, Nottingham East)

The clause relates to something that hon. Members will be excited to debate: REITs. I know that many of them get lots of letters about real estate investment trusts.

Greg Hands (Conservative, Chelsea and Fulham)

I do.

Chris Leslie (Labour, Nottingham East)

I am not surprised that the hon. Member for Chelsea and Fulham receives correspondence about them because they are very important investment vehicles and have changed the investment scene relating to property and the taxation of those financial instruments. REITs are securities that sell like a share on stock exchanges and invest in real estate directly through property or mortgages. As of September 2012, there were 34 countries with REIT-like arrangements in place. They are tax-advantage vehicles to encourage investment in the property sector. The clause and schedule 18 will allow UK REIT income, which is derived from investing in other UK REITs, to be treated as income of its tax-exempt property rental business.

On the face of it, this is a relatively sensible piece of housekeeping in relation to the cash flow and investment profiles of real estate investment trusts. If a REIT releases cash on the sale of a property but has yet to identify suitable subsequent property investment or is holding excess cash, it currently has few choices but to place the cash on short-term interest-bearing deposit, which obviously does not have a vastly impressive return, especially at the moment. Many argue that REITs could make better returns on such cash if they were allowed to invest short-term in other REITs. That would promote greater liquidity in the property market and attract additional investment income, particularly into the built environment. So far, so good.

However, I want to raise a couple of points with the Minister while we are on this provision. The first is a rather standard question. What is the effect of the policy on Exchequer revenues? It will have an impact more broadly on tax treatments. I do not know whether HMRC has done any modelling on how the arrangement might affect yields. I would be grateful if the Minister could let us know.

A more substantive question is what these real estate investment trust vehicles are investing in. I understand that by and large they are in commercial property arrangements. There are some circumstances in which residential property REITs exist. What impact do REIT arrangements have on the residential property market and its price? There is concern in some quarters about the Government looking at the demand side of the equation but not much at the supply side of the housing market.

If there are trades and transactions taking place in the residential property sector, there could be an impact on price inflation. Has the Treasury analysed the general impact of REITs on property prices in the residential sector? Does the Minister believe there is any supply-side benefit from the REIT arrangements in place? Will he also clarify whether there is any overlap between Help to Buy arrangements and investment in real estate investment trusts?

We have already debated whether Help to Buy would exclude those remortgaging to release equity for onward purchase of a second or third home. I am not particularly averse to that happening, but for the fact that tax subsidy raises lots of eyebrows. People would ask why the taxpayer should subsidise that sort of activity.

Brooks Newmark (Conservative, Braintree)

The hon. Gentleman is making some interesting points. Does he not agree that historically the REIT market is an efficient way to raise capital for individuals who want to make investments in real estate? I think that it provides the liquidity that is sometimes lacking.

I do not want to make his arguments for him, but I am going to now. There is a point about the transparency of the pools of REITs. As we have seen with other derivative instruments, the lack of transparency created the problems of 2008. I hope that he would want to make a point about the importance of ensuring that these pools of mortgages are transparent, showing the assets that they have beneath them.

Chris Leslie (Labour, Nottingham East)

I am very grateful to the hon. Gentleman for his refreshing and welcome non-party point. He is correct that some of the securitisation of the sub-prime housing market, particularly in the United States, was very much part of the cause of the crash that left us with financial difficulties in this country. It would be useful if the Minister were able to assure us that for REITs, which generally have been a welcome vehicle for certain types of investment, there are no longer unintended consequences of opacity in terms of what is happening, so that investors know what they are getting into when they buy into real estate investment trusts.

I shall be grateful if the Minister confirms that Help to Buy does not in any way give direct or indirect advantage to those who are investing in property through a real estate investment trust. In other words, can he confirm that there is an exclusion in the Help to Buy provisions that does not impinge on investing in property through REITs? I assume that that must be the case, but it is important that the Minister clarifies that.

Ian Mearns (Labour, Gateshead)

My hon. Friend will remember that when baskets of what are known as liar loans were sold on the international markets they were given triple A credit ratings by the credit rating agencies. One must query the judgment and the investigative powers of the credit rating agencies and the legitimacy of the opinions that they give.

Chris Leslie (Labour, Nottingham East)

That is something that we have to safeguard against. I do not think it is necessarily a facet of the REIT market, because it is something that previous Administrations also introduced and helped to support. But it is always worthwhile to guard against these things, and to make sure that people check the transparency of the arrangements.

The other question that I want to ask the Minister is about social housing and support for affordable housing construction. My understanding is that the Government originally consulted on the idea of using REITs as a vehicle for supporting social housing investment. However, for various reasons, they decided not to take that forward, so there was not a REIT vehicle arrangement to help what many of us think ought to be the priority. Of all the elements of the residential market that we need to start boosting, the social housing dimensions need the most support. Will the Minister explain why REIT investment routes have been blocked for social housing investment? What is the rationale for that, and is it something that he will take the opportunity to review again on another occasion? Those are the points that I have for the Minister on the clause.

David Gauke (Conservative, South West Hertfordshire)

Clause 38 and schedule 18 make improvements to the real estate investment trust—REIT—regime by allowing a UK REIT to treat income from another UK REIT as income of its tax exempt property rental business. That change will generate positive benefits for both the REIT industry and wider Government objectives, such as stimulating growth and tax simplification. It will help support the REIT business environment and help remove potential barriers to further future investment activity.

Let me provide the Committee with some background. REITs are a tax-exempt vehicle introduced to encourage investment in the property sector. Subject to certain conditions, REITs are exempt from corporation tax on property income, but their shareholders are fully taxed on the distributions or dividends received from a REIT.

Since their launch in 2007, 24 UK REITs have been created with a total market capitalisation of over £28 billion. Currently, if a REIT invests in another REIT then it is taxed on the distribution it receives in the same way as the end investor. However, it is only an intermediary between the lower-tier REIT and the end investor. That means that both the upper-tier REIT and the end investor suffer from tax on investment in the same underlying property.

The existing double tax charge on REITs investing in REITs is economically inefficient, and reduces the profits that a property can offer. Therefore, following Budget 2012 the Government undertook a consultation to consider the tax treatment of REITs investing in REITs, and 15 written responses were received. There was consensus that amending the tax treatment of REITs investing in REITs would generate positive benefits for both the REIT industry and wider Government objectives. Deloitte commented:

“It will allow REITs to run their businesses more flexibly and facilitate further investment into the UK property sector…The change may spawn a number of new substantial REITs”.

The Government have, therefore, decided to legislate on the matter. Clause 38 and schedule 18 will relax the REIT rules by allowing REITs to treat income from other REITs in the same way as income from property. Such income will be exempt from corporation tax on the condition that the upper-tier REIT distributes all the income from the lower-tier REIT to its investors. The tax on the property income distribution collected at the shareholder’s level will, therefore, be protected. The measure will have effect for accounting periods beginning on and after Royal Assent. Amending the tax treatment of income from REITs investing in REITs will allow REITs to split their portfolios into separate asset classes, which will facilitate greater investment in the property markets.

During the consultation, respondents proposed including REITs in the definition of “institutional investor”. We have listened to interested parties, and we announced at Budget 2013 that the Government would informally consult on the matter with the industry this year. HMRC is also informally consulting on one technical matter that may enhance the working of the schedule regarding the definition of tax-exempt income.

Brooks Newmark (Conservative, Braintree)

I am trying to understand the thrust of the clause. Is it a way of preventing double taxation by a REIT investing in a REIT, or is it a device to help facilitate capital flows in the property market to encourage people to invest in REITs? Is it one or the other, or is it really a bit of both?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend and I both served on the Bill Committee of the Finance Act 2006, in which REITs were introduced, and he and I spent many a happy hour debating them. The clause is designed to avoid double taxation to ensure that a REIT that invests in a REIT does not find that tax is being paid at two points. The provision should help the expansion of REITs and remove a barrier to growth. I hope that provides my hon. Friend with some clarification.

I turn to the points raised by the hon. Member for Nottingham East. He asked about cost. As the tax information and impact note states, the provision will have a negligible impact on the Exchequer. It removes a barrier that has prevented REITs from investing in REITs, which has generally not happened because it has been an inefficient structure. As a result, the cost of the change to the Exchequer will be negligible.

The hon. Gentleman asked about the relationship between REITs and the Help to Buy scheme. Those are two separate policies. Help to Buy aims to help families get on to the property ladder or to ascend it and REITs are essentially property investment vehicles, so they are in rather different places. Residential REITs are not yet a reality, but one is about to enter the market. There is nothing to prevent REITs from investing in residential property, but currently returns are not high enough to attract investors.

Chris Leslie (Labour, Nottingham East)

Simply on the Help to Buy point, if a residential REIT decided to purchase 100 residential units beneath the £600,000 threshold in the Help to Buy scheme, would it qualify for loan assistance from the Government?

David Gauke (Conservative, South West Hertfordshire)

No, it would be separate, because the Help to Buy regime is designed for people who are looking to reside in the property that they purchased, whereas the REITs regime is for those who are making a property investment as opposed to wanting to reside in the property that is purchased.

The hon. Gentleman asked about the creation of social housing REITs. He is right to say that we looked at that. Responses to the consultation suggest that the need for further changes to the REIT regime to support social housing REITs was seen as not particularly pressing. For some stakeholders, the changes to the REITs regime in the Finance Act 2012 were already sufficient to enable them to set up a social housing REIT.

Other interested parties currently not considering establishing a social housing REIT were concerned that housing at social rents alone would be unable to generate sufficient returns to attract investors. For those parties, further additional changes to the REIT regime, such as the removal of the listing requirement, would be unlikely to make any difference to their thinking. Essentially, we did not believe that the various ideas that we looked at to encourage social housing REITs would be effective.

The hon. Member for Nottingham East asked about the impact of REITs on house prices. We cannot yet assess the impact on house prices as there are not yet any substantial residential REITs on the market, so the answer is that they have not had an impact on house prices.

I hope that my answers are helpful to the Committee. The provision is a useful way to tidy up the REIT regime. I agree with the remarks made by my hon. Friend the Member for Braintree and by the hon. Member for Nottingham East: REITs are a useful addition to the UK system and can facilitate property investment. We are considering a relatively minor measure that can assist in that objective.

Clause 39 - Corporation tax relief for employee share acquisitions etc

Chris Leslie (Labour, Nottingham East)

I am grateful for the opportunity to say a few words about the clause, which relates to the rules on the availability of corporation tax deductions where firms award shares or share options to their staff. Apparently, the clause is not designed substantially to change the rules; it merely clarifies. If an award does not fit within the specified circumstances, no relief would be available. I understand that there might have been some grey areas around the provisions, which is why the Government are seeking to clarify that no deduction would be available for other expenses relating to the provision of shares or for any connected matter beyond that set out in the Corporation Tax Act 2009, and that no deduction is possible for the grant of a share option unless the employee requires the shares under that particular option.

It is not a particularly unexpected clause. It provides some clarification, although I have a couple of points that I want to raise with the Minister on the general provisions relating to tax relief for employee share acquisitions. First, can the Minister clarify the extent of the claims that HMRC may have queried or may feel were illegitimate, which were behind the need to introduce this clause? I assume there must have been various attempts to claim relief that were frowned upon or were not permitted under the provision. Have the Government estimated the cost to the taxpayer as a result of the avoidance arrangements or practices that were being examined?

I want to ask about the changing nature of employee share payments and share options, especially in the banking sector. The Minister will know that, for various reasons, inspired predominantly by the European Union, there has been a shift in the composition of remuneration arrangements for many in the banking sector; it is becoming less about salary or cash bonus payments and much more about rewards in the form of share payments and share options. Clearly such payments present a changing environment for taxation.

The Minister will have to forgive me for asking some naive questions about the practice. I assume that bankers who are remunerated in shares have to pay income tax at some level on the value of those payments, even if they are essentially payments in kind rather than in cash. Or is it the case that taxation is taken at the point at which the shares are disposed of? A big shift is taking place in the banking sector, particularly following some of the European Union decisions regarding payment of employees by share options or transactions. Has there been a change in the tax yield for the Exchequer as a result of that shift in behaviour? If banker A is given a £1 million payment, the calculation of the income tax deduction will be quite clear, but I am not sure—and it would be helpful for the Committee to know—if individuals are paid in shares, at what point they mature and at what point there are options on them. Inspiration will probably strike at any moment, but I would be grateful to the Minister if he elaborated on that.

Brooks Newmark (Conservative, Braintree)

Again, I am listening carefully to the political thrust of the hon. Gentleman’s question. Surely he knows as well as all of us—at least on the Government Benches—that the main beneficiaries of such options are employees in smaller businesses. The clause does not deal with bankers trying to circumvent the system. I am sure he will agree that the beneficiaries of most options are ordinary employees in small businesses with fewer than 10 people.

Chris Leslie (Labour, Nottingham East)

Indeed, I hope that that is the case. I support employee share ownership in small business arrangements; I agree with the hon. Gentleman totally on that matter. However, I do not agree with the rather curious, byzantine policy of asking employees to waive their employment rights in exchange for share options— something that we will debate later.

I am not sure about the ceiling on share acquisitions by employees and whether the policy is open as a practice for remuneration at higher levels. To what extent can such provisions be used as the main way in which bankers are remunerated? The practice will become increasingly common, not just with shares, but with contingent convertible instruments and other financial instruments with ongoing liability for the individual who has been paid, but may have sums clawed back if the company’s performance turns down in the long term.

Remuneration in that sector is becoming more complicated. That is my general point. I hope that it is not unreasonable to ask what the tax arrangements are, given that extra complexity.

Brooks Newmark (Conservative, Braintree)

I have just been reading the explanatory note. If I am wrong, the hon. Gentleman will correct me, but my understanding is that if they are receiving options of this kind, they are taxed as income rather than as capital gain.

Chris Leslie (Labour, Nottingham East)

Which is indeed the point I am trying to ascertain from the Minister. I want that clarified a little more in the public domain.

David Gauke (Conservative, South West Hertfordshire)

Clause 39 clarifies the legislation on the corporation tax deductions available where companies grant share options or award shares to their employees. It is one of several provisions in the Bill to ensure that corporations pay their fair share of tax and cannot exploit legislation to gain unintended tax advantages. The normal rule for employee share options and awards is that the availability of corporation tax relief for companies is linked to employees being charged to income tax on acquiring the shares. However, some companies have recently been claiming deductions for accounting expenses for share options and awards in cases that run clearly counter to this principle.

We are introducing the clause to put the tax position beyond doubt. It confirms that, other than in specified circumstances, no deduction is available for share options where an employee does not acquire the shares in question. It also confirms that where statutory relief for a share option or award is available, no additional deduction should be made. In the Government’s view, that is already the case under current corporation tax legislation. That brings me directly to the first question asked by the hon. Member for Nottingham East, which concerned the cost if we did not go ahead with clause.

Our view is that the measure confirms the law as it has been applied by HMRC since the current rules were introduced in 2003. It is entirely consistent with the principles set down by Parliament in 2003 that there should be symmetry between the availability of corporation tax relief for a company and the employee being chargeable to income tax on acquiring the shares in question. We are confident that our current application of the rules is correct. HMRC will continue to pursue any outstanding current cases under the normal procedures if need be before tribunals or the courts. This is a clarification of what the law currently is and we have not made any assessment as to revenue protected because we think that revenue was already protected under existing legislation, but it is always helpful to remove any uncertainty in these areas.

The wider question raised by the hon. Gentleman was about the taxation of shares in these circumstances. Income tax is chargeable on shares provided by reason of employment in the same way as other employment income. Usually income tax is due when the shares are acquired by the employee but there are some exceptions. Where there are share options, income tax is due when the options are exercised. The purpose of the rules is to tax rewards delivered through shares in the same way as other remuneration. The new provision aims to remove any possible uncertainty and to make it quite clear to companies that these claims are not valid. It is consistent with the intentions of Parliament when the current legislation was passed in 2003 and with the way HMRC has applied the rules since they were first introduced.

Clause 40 - Derivative contracts: property total return swaps etc

Chris Leslie (Labour, Nottingham East)

The clause—again, a very exciting one for hon. Members, I know—relates to derivative contracts and property total return swaps, which come up frequently in Chelsea and Fulham but no doubt more frequently in Gateshead and other parts of the country. I am sure my hon. Friend the Member for Gateshead is constantly dealing with such matters in his caseload.

Ian Mearns (Labour, Gateshead)

I have had to employ extra staff.

Chris Leslie (Labour, Nottingham East)

As my hon. Friend says, he needs extra staff for that work load: I am sure the Independent Parliamentary Standards Authority will be supportive.

In a total return swap, the party receiving the total return will receive an income generated by the asset, as well as the benefit if the price of the asset appreciates over the life of the swap; in return, the total return receiver must pay the owner of the asset the set rate over the life of the swap. The clause, I am told, responds to tax avoidance schemes involving property return swaps and is designed to stop firms exploiting the property total return swaps legislation to convert capital losses into trading losses.

Companies are apparently abusing the current law by entering into swaps between different members of a group of companies in order to convert capital losses into income losses, even though the swap does not result in the group obtaining any net exposure to property. Clearly, therefore, the clause is important as it is needed to deal with that loophole. The clause rules out any capital return where the swaps are intra-group and limits any capital return to the actual return in the contract.

Tackling such opportunistic tax avoidance schemes is clearly an important goal and one which the Opposition support, especially given the context of the wider size of the derivatives market. When trying to keep track of financial innovation, as it is sometimes known, legislators and policy makers have often struggled to keep pace. Given that the derivatives market is now something of the order of $1.2 trillion, we have to get these matters right.

I have some questions for the Minister on the clause. First, there must surely be some enforcement complexities involved in watching and overseeing some of the derivative tax arrangements. How will HMRC—particularly given the pressures that it is under, with 10,000 staff lost and resources depleted across the organisation—police the arrangements in the clause? Who will be carrying out that enforcement activity—does responsibility for it fall to a particular unit in HMRC?

Will the Minister set out the extent of the current abuse of the loophole—did a particular case prompt the clause? How much do the Government anticipate gaining by closing the door on the practice? Finally, given that the United Kingdom is host to around 75% of the EU’s derivatives market, how will the clause apply to foreign companies with subsidiary operations in the UK? We are talking about intra-group arrangements, and so some cross-border issues crop up with regard to corporate form and corporate governance: have the Minister and his officials addressed the international dimension to the clause?

Steven Baker (Conservative, Wycombe)

Notwithstanding the hon. Gentleman’s opening remarks, one of the things that has excited me over the course of my short parliamentary career has been the international financial reporting standard and its effect on derivatives: the mark-to-market accounting rules within it incentivised banks to transact in derivatives, in particular because they can up-front unrealised cash flows to manufacture profit and capital. Without going too deeply into that, I would refer the Minister to a book called “The Law of Opposites” by my colleague Gordon Kerr, who has created that kind of product. Have the Government assessed whether IFRS accounting is incentivising the creation of these derivative contracts? If so, will they look at amending those rules, not just to address this problem but in the interests of the wider banking system?

David Gauke (Conservative, South West Hertfordshire)

Clause 40 makes changes to ensure that the legislation that applies to property total return swaps cannot be exploited for tax avoidance and that the tax outcome of the legislation matches genuine exposure to the property market.

I will briefly set out some background to the clause. Property return swaps can be used to give investors exposure to the property market without actually investing in properties, or to allow property investors to hedge their exposure. The tax legislation covering swaps aims to match the treatment of actual investment in property, in particular by providing that returns from swaps may be taxable as capital gains where they are linked to a property index.

Some avoidance schemes exploit this legislation with the use of contracts that do not give genuine exposure to movements in both directions in the property market, and that generate capital returns that exceed those that arise from movements in actual property values.

The aim of these schemes is artificially to convert capital losses into trading losses, which can then be set against other profits in ways not intended by the legislation. We do not accept that these schemes achieve the results claimed, but this legislation will put the tax position beyond doubt.

Changes made by clause 40 will prevent avoidance in three different ways. They will provide that capital gains treatment will not be available when swaps are entered into between companies in the same group. They will provide that any tax charges are linked to genuine movements in the property market, and not limited with the use of any artificial arrangements; and they will provide that capital gains treatment will not be available where tax avoidance is involved.

The hon. Member for Nottingham East asked whether HMRC would be able to cope with dealing with derivatives such as those we are talking about. Schemes would be disclosed under routine enforcement, and the changes are relatively minor in relation to the 2009 legislation. Those matters will be monitored by inspectors looking at company accounts and by specialist teams.

I am tempted to get into a debate with the hon. Gentleman about job reductions in HMRC, for which he quoted a number of 10,000. I do not know why he did not quote a number of 30,000, because that is what occurred under the previous Government. To be fair to the previous Government, there have been opportunities to reduce the number of people working in HMRC in particular areas, with the use of new technology and improved efficiency. It is not just about numbers. That is the approach that we have certainly taken, and HMRC’s yield is increasing significantly over the course of this Parliament. However, I digress.

The hon. Gentleman also asked how overseas companies will be affected. Where foreign companies fall within the corporation tax regime, because they have a permanent establishment in the UK that is chargeable to corporation tax, normal corporation tax rules will apply. As for how many companies are likely to be involved and how much tax, HMRC is aware of three companies that have used the scheme four times in total. The estimated loss was in the region of £100 million per year.

My hon. Friend the Member for Wycombe asked about the application of the IFRS. I can assure him that HMRC is working actively on its adoption to ensure that legislation keeps up to date. I do not intend to discuss the wider issue to which he referred, but I hope that he is reassured by my remarks.

With those comments and, in summary, I want to make it clear to the Committee that the three changes will ensure that the tax treatment continues to provide a fair outcome for genuine users of swaps linked to the property market, but that the policy cannot be used for tax avoidance. I trust that the clause will stand part of the Bill.

Clause 41 - Corporation tax: tax mismatch schemes

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss that schedule 19 be the Nineteenth schedule to the Bill.

Chris Leslie (Labour, Nottingham East)

The clause will block a scheme that used partnerships to avoid what is known as group mismatch legislation. It targets a loophole whereby companies reduce their tax liabilities through the use of loans and derivatives that create artificial losses. It worked by companies entering into loans with a partnership of which they were a member. The loan was then accounted for differently by the company and the partnership to give a tax advantage. I am sure that members of the Committee know that that is described as the asymmetric treatment of loans or derivatives. Partnerships or other collective schemes have been used repeatedly in tax avoidance schemes, and it is important that we support steps that address some of those practices. The clause targets schemes that aim to defeat the group mismatch legislation, such as allowing different members of a group of companies to bring separate amounts into account in respect of the same loan or derivative.

HMRC is dealing with several ongoing court cases, and it would not be proper to refer to them for sub judice reasons. However, it is notable that some comments have been made by HMRC representatives about the schemes making what would otherwise be taxable income vanish into thin air. That was a good way in which to explain how such accounting treatment can create loopholes that are exploited, especially in the catering, hospitality and brewing industries. I should be grateful if the Minister can give us some rationale for why particular groups of companies in those sectors have taken to using such a provision as a way in which to minimise their tax exposure.

Will the Minister also say a word about the complexity of the Government’s chosen solution, with more provisions being jimmied into the Corporation Tax Act 2010, much of which will duplicate some of the current mismatch rules? Would it not be simpler to deal with the problem by amending the current rules so that they catch a wider set of arrangements, instead of adding eight further clauses to the existing tax code? Will the measures be needed when the general anti-abuse rule is put in place for Royal Assent? How many tax mismatch schemes are currently being examined by HMRC? What estimate can the Minister give of the number of companies or transactions that will be captured under the new law?

Finally, will the legislation cover mismatch schemes that cross borders? It is a point I have already asked about, but it is more relevant now in relation to some of the transfer pricing arrangements that have been in the media recently. Such arrangements could cut into some of these particular group mismatch arrangements. I would be grateful if the Minister could also say whether that will also form part of the broader OECD discussions about tax avoidance that we hope will take place.

David Gauke (Conservative, South West Hertfordshire)

Clause 41 and schedule 19 make changes to defeat tax avoidance schemes that rely on a mismatch being created by accounting in two different ways for a transaction entered into by a company. The changes are intended to defeat avoidance schemes that involve loans or financial derivatives entered into by companies. Such schemes involve a mismatch being created by a company entering into a loan or a derivative with a partnership of which it is a member, or other similar arrangements. The company and the partnership account for the loan or derivative differently so that a mismatch arises. For example, a loss might arise in the company with no matching profit in the partnership, giving rise to a tax saving overall where there has been no real economic loss.

We do not accept that these schemes achieve the effect that is claimed, but clause 41 and schedule 19 will put the matter beyond doubt. The changes that they make will ensure that, where a tax advantage arises from any asymmetry in the way in which a company accounts for a loan or derivative, that advantage will be removed. The clause is broadly worded so that any asymmetry is caught, whatever the details of the particular structure used.

The hon. Member for Nottingham East asked why the normal tax rules did not prevent this avoidance. If a company is taxed on financial instruments based on its own accounting profits or losses, different accounting policies may be adopted in respect of the same transaction, where a company enters into a financial transaction with a partnership of which it is a member so that the same transaction is reported by the company and the partnership in different ways. That may give rise to an asymmetrical tax outcome. Transactions involving two different companies will be caught by the group mismatch rules in the Corporation Tax Act 2010, and any tax advantage will be prevented. Clause 41 and schedule 19 will prevent any tax advantage from arising where a single company is involved.

The hon. Gentleman asked whether the legislation was too complicated. It is worth pointing out that it is based on the group mismatch anti-avoidance legislation in the 2010 Act, so it will be familiar to both companies and their advisers. He also asked whether the general anti-abuse rule would prevent this kind of avoidance. Depending on the circumstances, the GAAR may well prevent it. However, this precisely targeted measure will give companies certainty and close down avoidance schemes that rely on such a structure.

The hon. Gentleman asked how many companies liked to use or had used the scheme, and how much tax was involved. HMRC is aware of four companies using the scheme and the loss of tax is estimated at £30 million each year. There was a concern that the use of such schemes would spread quickly if we did not take action. The use of the scheme is not limited to one sector—indeed, even among that small sample, companies in a range of sectors appear to have used it.

I hope that I have provided some further information to the Committee and some clarity on the matter. I welcome the hon. Gentleman’s support for the measure, which is designed to protect revenue and deal with avoidance. It is part of the Government’s determination to deal with tax avoidance at every opportunity.

The hon. Gentleman raises a wider issue of the base erosion and profits shifting work that the OECD is undertaking, following the encouragement given to it by the Prime Minister and the Chancellor. We are actively involved in measures to ensure that the international corporate tax system is fit for purpose and adequate for the 21st century. There is, perhaps, a wider debate to be had on that, but, with regard to clause 41, I hope that I have provided sufficient clarity to the Committee so that it may stand part of the Bill.

Clause 42 - Tier two capital

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 11, in clause 42, page 20, line 8, at end add—

‘(7) The Treasury shall publish details of changes to tax revenues as a result of amendments made by this section and of each other change in respect of the treatment of regulatory capital requirements and tier one capital.’.

David Crausby (Labour, Bolton North East)

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

Chris Leslie (Labour, Nottingham East)

We now turn to issues that may be slightly more illuminating for the Committee: in a nutshell, the tax breaks that banks are able to receive. Although the way that is described may seem opaque, we are looking at a clause that relates to tax relief for the capital instruments that the banks are able to gain as part of the changes in the structure of their balance sheets, prompted by regulatory shifts.

The amendment would simply ask the Treasury to publish details of changes to tax revenues as a result of the amendments made in clause 42, which is clearly something that it would want to support, and also to be transparent about the other changes that it is making in relation to the treatment of regulatory capital requirements in tier one capital. The amendment would force the Chancellor to publish the costs to the Exchequer of tax relief granted to the banks for their new regulatory capital requirements.

The legislation will be treated as having come into force on 26 October last year. I am told that the tier one capital changes that were announced in the Budget will be enacted through a statutory instrument, which will mean that the coupon—the annual debt interest charge—will become tax deductible. That relates to the capital requirements directive, CRD IV, from the European Union.

In terms of tier two capital arrangements, however, the changes announced in the Budget will be enacted in the Bill. For a start, it would be useful if the Minister would explain the different legislative routes being taken for deductibility in respect of tier one versus tier two capital, and why there has not been some comparability between those two forms of capital instrument. Some explanation on the differential timings that the Treasury took on those questions would be particularly helpful.

The clause will mean that the treatment of tier two remains the same after tier two debt instruments have been re-categorised as bail-in-able; in other words, when they are no longer seen as normal commercial interest instruments.

On capital arrangements, there is so much financial innovation and complexity that it is sometimes difficult for the layman or laywoman to penetrate the jargon and nomenclature of some of these banking instruments. It is therefore difficult for policymakers to get a grip on what is going on and what changes are happening, so that we can be clear about what tax advantage is being granted to the banking sector as a result of the Treasury’s moves. For a start, I urge the Minister to make his comments as accessible as possible so that we can all have a proper insight into the realities of what exactly is happening. I expect that we are talking about considerable sums of money and large amounts for the taxpayer.

Some capital instruments are equity, and many Members will be familiar with their character, but some capital instruments fall into that grey netherworld where they are half debt, half equity or quasi debt, quasi equity. It is therefore understandable that the regulators and the Treasury are looking at the definitions and the tax treatment of each along the way. Perhaps it is the judgment that has been made about the extent to which there is any ongoing liability for the party that is making the loan to the banking institution. It would be useful if the Minister clarified the framework he is applying to the application of tier one and tier two capital instruments with banking capital.

We know that the Government have struggled somewhat with tackling the questions of capital adequacy and leverage in the banking sector. For the banks to be sufficiently safe after the global financial crisis, we need to ensure that there is a good relationship between the capital adequacy rules and the leverage that banks are able to exercise.

In a separate legislative environment, the Financial Services (Banking Reform) Bill continues to make progress through Parliament. I know that hon. Members are familiar with that Bill. We are discussing capital adequacy and leverage in those forums, but it is important when it comes to the taxation of some of these capital instruments that we are clear about the subsidy that the taxpayer is indirectly providing to the banking sector so that it can operate in a safe and sustainable way. The regulators require that a certain amount of capital is set aside.

We have heard about the subsidies for particular sectors and picking winners, and the favourable tax treatment and the deductibilities for the banking sector are clearly of interest to our constituents. Some hon. Members shake their heads and say that it is not of interest to our constituents, but it is an important matter.

James Duddridge (Conservative, Rochford and Southend East)

I was shaking my head not because of the hon. Gentleman’s comment but because of his more general analysis. I thank him for allowing me to put it on the record that that was not my intention.

Chris Leslie (Labour, Nottingham East)

I stand corrected. It is my analysis that causes the hon. Member for Wycombe to shake his head. I am not particularly surprised about that.

Steven Baker (Conservative, Wycombe)

I am sure that the hon. Gentleman has followed my speeches for long enough—he has at least been the victim of them—to know that I think that banks should be stripped of all privilege and operate in a capitalist system like every other firm.

Chris Leslie (Labour, Nottingham East)

In many ways, that is the nub of the question. We need to understand what the subsidy is from the taxpayer to the banking sector. This subject is cloaked in massive complexity—there is talk of tier one versus tier two and capital instruments and all those other things; it is no wonder that people glaze over with the lexicon that we use with these arrangements. I know that the Minister will rise above obfuscation and take the opportunity to say clearly in black and white how much money the taxpayer is providing through the tax deductibility for those reserves and capital arrangements that we expect banks to have. That is the nub of the question.

I am particularly keen that the Minister gives us some insight into how the Prudential Regulation Authority’s announcement on capital levels and capital adequacy might impact on clause 42’s operation, because either yesterday or the day before, the Bank of England and the PRA made a number of announcements and judgments about the capital adequacies of individual banks. We now have some figures and expectations about the capital adequacy of the main institutions. They will give us a clearer baseline against which we can judge the taxpayer subsidy for those particular banks. In other words, it might even be possible for the Minister to provide the Committee, in tabular form, with some sort of bank-by-bank breakdown of the tax reliefs and deductibilities for the capital instruments that we now know are expected of each institution. Does the Minister intend to publish that and get in line with our amendment regarding the transparency of the impact on tax revenues and taxation more generally of the deductibility of such capital instruments?

A fair argument may be made to support certain deductibilities for certain types of instrument. Will the Minister set out where he draws the line? There are many forms of capital instrument. Tax deductibilities arise in other corporations in other circumstances, and I would not argue that there should necessarily be no tax reliefs for capital arrangements in those circumstances. However, a new generation of capital instrument is being created in the market, for which a generous set of tax assumptions is being provided. It would help if the Minister could tell us a little about the story of that generation of new tier two capital arrangements.

For the time being, I will draw my comments to a close, but I might ask the Minister for further clarification.

Sajid Javid (Conservative, Bromsgrove)

Clause 42 makes changes to make it clear that the coupon on tier two regulatory capital instruments will continue to be tax deductible for issuers, and that such instruments will be treated as what one might call normal commercial loans for the purposes of tax grouping rules. That retains the status quo. The equivalent debt capital instruments currently in use are treated as tax deductible.

Let me briefly provide hon. Members with some background to the clause. Tier two instruments are subordinated unsecured debt instruments that form a key part of a bank’s capital. They have a minimum maturity of five years and may be redeemed only at the discretion of the issuer. Such debt instruments enable banks to raise funding to strengthen their capital positions and to facilitate onward lending to the wider economy.

When issuing tier two instruments, banks must ensure compliance with regulatory requirements. Tier two capital instruments that banks are issuing now include terms that ensure compliance with the forthcoming EU capital requirement directive, known as CRD 4, and with current and forthcoming rules relating to capital adequacy in the United Kingdom. The new regulatory requirements are designed to ensure that banks improve the quality and quantity of their capital base to absorb losses and to protect depositors and the taxpayer. However, the requirements make the tax treatment of tier two instruments under current rules uncertain, because existing tax law predates CRD 4 and was not written with such types of instrument in mind.

The Government already have powers, provided by the Finance Act 2012, to make regulations to prescribe the tax treatment of such instruments once CRD 4 is finalised.

Sajid Javid (Conservative, Bromsgrove)

The Government already have the power under the Finance Act 2012 to make regulations to prescribe the tax treatment of tier two instruments once CRD IV has been finalised. When the Government assumed those powers last year, the intention was for CRD IV to take effect in January 2013. By last October, however, it had become clear not only that CRD IV would not be agreed before the year end but that banks needed to start issuing tier two instruments that included the new regulatory features. To provide the certainty that banks needed to enable them to continue to use tier two instruments to raise capital, the Financial Secretary to the Treasury clarified the tax treatment of such instruments in a written ministerial statement on 26 October. Clause 42 gives effect to that clarification, which applies from the time of its announcement last October.

James Duddridge (Conservative, Rochford and Southend East)

Has the Minister considered concluding his remarks and moving to a vote, given that there are no Labour Back Benchers here at all and only the shadow Minister has bothered to turn up to the debate? Has the Minister considered the merits of such a move, or is it simply childish to make that point?

Sajid Javid (Conservative, Bromsgrove)

I think my hon. Friend is pointing out the new iron discipline that exists on the Opposition Benches. However, as I am in a generous mood, I will not take advantage.

Chris Leslie (Labour, Nottingham East)

Returning to the topic, though, the Minister mentioned the timetable for tier two instruments, but can he say a little more about the Budget announcement about rules on interest deductions for additional tier one capital, which he said at the time would be implemented in due course? When will the Department publish the details of those additional tier one instruments?

Sajid Javid (Conservative, Bromsgrove)

It is important to point out that the clause relates to tier two only, but because I am in a generous mood, and if you will allow me, Mr Crausby, I will try to answer the hon. Gentleman’s question. The Government announced that the coupon on additional tier one capital would be tax-deductible. The regulations and the power included in the Finance Bill 2012 will be used to achieve that, which will remove similar uncertainty to that which applied to tier two. It will make our financial system stronger by encouraging banks to ensure that they have sufficient capital to withstand any future financial crisis. The additional tier one measure will not have an Exchequer cost because it replaces existing stocks of hybrid capital that were already tax-deductible. I will discuss the timing when I address the hon. Gentleman’s amendment.

The changes made by clause 42 will mean that the coupon on a bank’s tier two loans will not be prevented from being deductible as interest in computing taxable profits. The changes will also make it clear that a bank’s tier two loans are normal commercial loans for the purposes of corporation tax grouping rules. The changes will not apply if a loan forms part of a scheme or arrangement where one of the main purposes is the avoidance of tax.

Amendment 11 asks that the Government publish details of changes to tax revenues and of each other change in respect of the treatment of regulatory capital requirements and tier one capital. Let me first clarify exactly how banks and other regulatory capital instruments will be treated for tax.

Consistent with long-standing rules that apply across the economy, banks’ tier one equity capital will not be deductible for tax purposes. In this year’s Budget, the Government announced that they will legislate to clarify that banks’ additional tier one debt capital instruments will be tax-deductible for corporation tax purposes. The issues around additional tier one capital instruments are similar to those around tier two instruments in that they now include terms to comply with CRD IV. Those features will ensure that banks improve the quality of their capital base to absorb losses and to protect depositors and the taxpayer, but the tax treatment of such instruments is uncertain under current rules. The changes made in respect of additional tier one instruments will be made once CRD IV is agreed through regulations made by the affirmative procedure, using the powers provided in the Finance Act 2012.

In setting out the new treatment of the instruments, there is an implication that we have somehow given a new relief by stealth. That is clearly not the case. Our announcements merely clarify that new tier two and additional tier one debt capital instruments will continue to be subject to the existing and long-standing tax treatment for such regulatory capital instruments, and that banks are not being given any kind of preferential tax treatment over other sectors. Other industries are not subject to the requirements of CRD IV and so continue to get a tax deduction on their long-term debt instruments without any need for legislative clarification.

Chris Leslie (Labour, Nottingham East)

Just to be clear, the Minister is saying that existing tier one equity is not tax-deductible, but additional tier one capital will be tax-deductible. People could therefore reasonably assume that that is a subsidy of sorts for banks.

Sajid Javid (Conservative, Bromsgrove)

I thank the hon. Gentleman for his question—it is important to clarify the matter and get it right—but I am afraid that his understanding is incorrect. The current situation is that tier one capital is non tax-deductible, and that will not change; tier one will remain non tax-deductible. What is called additional tier one in CRD IV phraseology is virtually the same as what is currently referred to as hybrid capital, and it will remain tax-deductible. I hope that is clear.

Chris Leslie (Labour, Nottingham East)

The clue, surely, is in the word “additional”. If the banks, because we as a society deem that a certain amount of safety is needed in their capital base, are being required to post additional tier one capital and deductibility is therefore associated with that, it is a tax advantage to an industry that would otherwise provide for its safety without that tax advantage. It is a choice that the Treasury is making. The Treasury could decide that the tier one restrictions on deductibility would also, for example, apply to additional tier one capital, could it not?

Sajid Javid (Conservative, Bromsgrove)

I am afraid that shows a lack of understanding among the Opposition of how bank capital works. To be clear, all debt instruments issued by banks are tax-deductible for corporation tax purposes. What is not tax-deductible is shares, or what we might call equity. Equity remains non tax-deductible. Any shares issued by any bank will not be tax-deductible for corporation tax purposes, which is consistent with any other company that might not be a bank.

Also for consistency’s sake, if banks issue debt instruments, they will be tax-deductible and will remain tax-deductible for corporation tax purposes. Additional tier one is a debt instrument. In terms of subordination, it would be first in the pecking order if a bank were to fall into trouble. That is referred to in the current situation, without CRD IV, as hybrid capital. CRD IV will change the phraseology so that a common phraseology will be used throughout the European Union. It will change the definition of additional tier one from hybrid capital to additional tier one.

While discussing this clause, we have said that we as a Government will not change the tax treatment of that capital. That is how it has been treated for as long as I can remember, because it is a debt instrument. Also, importantly, it is the same treatment applied by every other country in Europe.

Chris Leslie (Labour, Nottingham East)

Just to clarify, is it not the case that the regulatory requirements will force the banks to hold a far greater volume of hybrid capital instruments?

Sajid Javid (Conservative, Bromsgrove)

We do not have the final form of CRD IV yet, but its intention is to have a situation where banks hold more loss-absorbing capital, which will include tier one, additional tier one and tier two. That is the overall policy intention, and this Government support it, given the importance of the banking system to the wider public and the implications for the taxpayer if things go wrong.

That is the intention, and the Government want to clarify that banks will be able to work with the information when they issue those instruments. They are already starting to issue tier two instruments to replace maturing or redeemed tier two instruments, and we want to ensure that they will continue to get the same tax treatment as currently. That is the purpose of the policy. It is a continuation of existing policy, but the need for clarification has arisen as a result of CRD IV.

Chris Leslie (Labour, Nottingham East)

I am truly grateful to the Minister for his kindness in giving way so frequently. His generosity reflects extremely well on him. I wonder whether I might press him further on this point. The banks have been judged as not safe unless they rapidly and significantly increase their capital base, particularly in respect of tier two capital instruments and hybrid capital instruments. Therefore, as a society we are saying, “This is the amount of capital that they should hold.” Therefore, there is a quantum increase in the amount of tax deductibility—is there not?—for the proportion of capital that those banks will be taking.

I am not sure that the Minister intends to, but he almost gives the impression of saying, “Oh, don’t worry about this. It’s business as usual and no particular change is involved here.” However, very significant sums of extra capital are required. Therefore, the amounts of tax deductibility for that capital are changing, are they not?

Sajid Javid (Conservative, Bromsgrove)

As banks respond to CRD IV and build up their capital base, to the extent that they do that with additional tier one instruments—currently referred to as hybrid debt—and tier two, they will continue to receive the same tax treatment on that as they do today. That is the importance of this clarification. We want to ensure that banks can be confident as they look at ways to boost their capital—which in turn makes the banks more secure and safe to the advantage of all—that they continue to receive the same tax treatment that they already receive for that type of instrument.

Chris Leslie (Labour, Nottingham East)

Is that the same arrangement that applies in all other international jurisdictions?

Sajid Javid (Conservative, Bromsgrove)

For tier two, as far as I am aware. I cannot think of a single country that does not treat tier two or tier two-like instruments as tax-deductible. If the hon. Gentleman wants to ask me any other questions on this—

Chris Leslie (Labour, Nottingham East)

I would, actually. It is very kind of the Minister; he is being particularly generous today, to his credit. The bank levy is calculated on a complex formula related to the balance sheets of banks. It would be helpful if the Minister clarified whether additional tier one—those hybrid debt instruments that he talked about—are being factored into the bank levy calculations.

Sajid Javid (Conservative, Bromsgrove)

The bank levy is on the assets of banks. We are talking here about the liabilities of banks, so it should not make any difference, as it is on the assets. There were lots of questions from the hon. Gentleman and I hope I have cleared up that point.

Kwasi Kwarteng (Conservative, Spelthorne)

I have been sitting here amazed that we have spent 10 minutes of valuable Committee time establishing that hybrid capital is treated as a debt instrument, which it has been ever since it was created in the late ’90s. That is not controversial or a matter about which there has been any debate. Everyone knows that hybrid capital is treated for tax purposes as a debt instrument. That has always been the case.

Sajid Javid (Conservative, Bromsgrove)

My hon. Friend raises an important point. We know that one reason our banking sector got into so much trouble in 2007 and 2008 was because the previous Government did not understand banking. We can see that now from the questions we have received. Over the past 10 minutes I have had to educate those on the Opposition Front Bench on the basics of bank matters. I do not mind doing that but I do not think it is the purpose of the clause.

Ian Mearns (Labour, Gateshead)

I am grateful to the Minister and wonder whether he could educate these poorly educated Members a little further. Once the CRD IV regulation requirements come into the place, tier two capital must have more loss-absorbing features. Will he explain to an uneducated Opposition Back Bencher the nature of those loss-absorbing features of tier two capital under the directive?

Sajid Javid (Conservative, Bromsgrove)

Tier two capital can take various forms, but what CRD IV will set out is what is classified within the European Union’s context as tier two. Up until CRD IV each country had a different approach. So some of the common features will be that it has to have a maturity of more than five years and that in the event that a bank is in trouble and so needs to take what is called a loss-absorbing activity, the tier two instrument must be forcibly converted. Most likely it will be converted into shares, but how that conversion takes place can be different for each institution. I hope that helps the hon. Gentleman.

The legislation does nothing more or less than clarify what is already in place. We believe that it is fair and consistent. It removes any uncertainty for banks and investors which would otherwise negatively impact on banks’ ability to issue new instruments. There is no need to produce a forecast for the effect of the policy’s change because there is no policy change. As with all tax rules, the Office for Budget Responsibility will instead take account of the Exchequer impacts as part of the general fiscal forecasts. Therefore, as clause 42 only clarifies the current position of the law and there is no policy change, the amendment is not needed.

In conclusion, clause 42 makes it clear that the coupon on tier two regulatory capital instruments will be tax-deductible for the issuer and the issue of tier two instruments will not affect the tax grouping rules. The clause removes uncertainty for banks and investors which would otherwise negatively impact on a bank’s ability to issue new instruments, fundingthat will enable banks to strengthen their capital positions and to facilitate onward lending to the wider economy. The amendment calls for a revenue forecast for the change in tax treatment that has not happened. I therefore ask the hon. Gentleman to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister even though from time to time his remarks can seem slightly patronising. I am sure that is not intentional. He is, after all, the brightest person in the room. He is a former banker at Deutsche bank. I am sure his fingers are covered in the evidence of various capital instruments at various different levels. We expect great things of him in the future. For those of us who are mere novices when it comes to these practices, he helpfully and in a very slow and clear way told the Committee that we should not worry our pretty little heads that there is any policy change involved in this matter. There is nothing changing here whatever. There is nothing to see. Move along. There is nothing to worry about. Clearly the Minister knows exactly what he is talking about in all respects. That is very reassuring.

However, he talked about tax treatment. He did not talk about tax revenues as much as I would have liked. He gave the impression that there was no change of policy and yet we have a clause here which, as far as I can see, changes policy; otherwise, there is no reason to have it in the Bill. In fact the hon. Member for Spelthorne joined in the general narrative that there is nothing to look at here, so please move along. Why, he asked, dwell on the tax treatment of the banking sector because, didn’t we know, tier two has always been treated this way? I am surprised that we need a clause at all if that is the case. I am sure the hon. Gentleman can explain why, if there is no change, we are having a change here in the tax code.

It is important that our constituents get some transparency in understanding how the Treasury is bending over backwards to accommodate the banking sector as it has on bonuses, as it has on the bank levy, consistently collecting far less than it was supposed to do. When it comes to the tax revenue implications of capital instruments, our constituents need to know the truth about what advantages might be provided not just by the changes in clause 42, but in the associated statutory instruments relating to additional tier one and tier one instruments.

Kwasi Kwarteng (Conservative, Spelthorne)

My remarks were addressed purely and exclusively to the nature of hybrid capital, which, as its name suggests, is partly like an equity instrument and partly like a debt instrument. Historically, it has always been treated for accounting and tax relief purposes as a debt instrument. This is not something that has been invented in the past three months; it is something that is well known in the markets. That is the point I was making.

Chris Leslie (Labour, Nottingham East)

That is a very helpful clarification, but the hon. Gentleman must admit that there is a change of policy here. Even if it is a clarification, it is clearly something that required an intervention in the Finance Bill. It is not just a statutory instrument or a minor tweak that is consequential, supplemental and incidental to existing legislation; it is a clause in the Finance Bill. Therefore, it seems pretty harmless for the Committee to insist that the Treasury publishes details of the tax revenue implications of the change, and also those for tier one capital and hybrid instruments.

I do not think the Minister said at any point that there will be no changes to tax revenue as a result of these changes. I am pretty sure that was not his comment, but I will give way to him if I have misheard in my naivety. In my simplicity, I may not have understood the complex nature of tax and the banking sector. The Minister does not wish to rise to speak, so I assume that there will be changes to tax revenue as a result of these measures.

Sajid Javid (Conservative, Bromsgrove)

There are not.

Chris Leslie (Labour, Nottingham East)

“There are not,” he says from a sedentary position.

Sajid Javid (Conservative, Bromsgrove)

Mr Chairman, I did not take up the hon. Gentleman’s invitation at first because I had already made the point. However, I am happy to clarify it again. This is a continuation of existing tax policy. The clause deliberately provides clarity to banks that currently have to issue tier two instruments in advance of CRD IV coming into practice. It is incumbent on the Government to provide that clarity, which is based on existing policy. In terms of its impact on tax revenue, there are no implications of issuing this clarification.

Chris Leslie (Labour, Nottingham East)

The Minister talks about clarity, but that was one of the least clear remarks I have ever heard him utter. Let us be certain that clarity for the banks is absolutely paramount. However, when it comes to clarity for the taxpayer, there is absolutely none. He will not say that there will be no tax revenue implications from the changes in this amendment. It is important that we test the view of the Committee on this amendment. It is necessary for us to get some proper insight into the tax and revenue ramifications of these particular changes. I am sorry if our questions are naive, but it was the supposed intellect and insight that the geniuses in the banking sector had before the crash that got us into this mess in the first place. I am quite sure that the Minister was not one of those with responsibility for getting us into the mess. I would like to press the amendment to a vote.

Greg Hands (Conservative, Chelsea and Fulham)

On a point of order, Mr Crausby. I think that Mike Thornton and Stephen Williams might have been missed out.