FINANCE BILL

Public Bill Committee, 11 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 51 - Abolition of contracting out of state second pension: consequential amendments etc

Chris Leslie (Labour, Nottingham East)

Good morning, Mr Crausby. I know how keen everyone is to be up and running back in Committee. How we have missed it since last week. But fear not, because we are back and settling in for a good scrutiny session.

Clause 51 deals with consequential amendments following the abolition of contracting out of the state second pension. It would be useful if the Minister gave us a brief explanation of how far the clause extends into wider questions about that abolition, the discussion of which will shortly take place on the Floor of the House on Second Reading of the Pensions Bill. Pensions provisions are very technical, and some people find it difficult not to glaze over when discussing them, but not me; I find them absolutely riveting and scintillating. They matter because they affect our constituents, if not ourselves, long in advance of our reaching the golden age of retirement. Will the Minister set out how the clause relates to such wider questions?

Changes have already been made to the contracting out of defined contribution pension schemes, but I do not think that the clause extends to the proposal—it may be in the Pensions Bill—about the contracting out of defined benefit pension schemes. There are obviously big questions about that reform. In general, we all want to move towards simplicity and we welcome simplification of the pensions system. It would help if the Minister gave us an overview of how the clause relates to that.

I have specific questions about those who will be affected by the implementation of the new start date in relation to the state second pension arrangements—it used to be known as the state earnings-related pension scheme—that changed in about 2007. An enhanced single-tier pension is planned for when those schemes disappear, but people will be asked to pay in for more years—35 years as opposed to 30 years—which has a cost and some consequences.

Similarly, those who might have enjoyed a relief from a discount in national insurance contributions after having opted out of the state second pension, because they were in a defined benefit scheme—they are typically in the public sector, where defined benefit schemes are prevalent—will contribute significantly more. The Treasury has already pencilled in billions of pounds of gain from April 2016. Will the Minister elaborate, and generously indulge me by letting me ask questions along the way?

Sajid Javid (Conservative, Bromsgrove)

I welcome you back to the Chair, Mr Crausby. I thank the hon. Member for Nottingham East for his comments, and I am pleased that he finds the topic as riveting and scintillating as I do.

Contracting out of the state second pension through defined contribution pension schemes was abolished from 6 April 2012—I shall say more about that in a moment—and clause 51 makes changes to tax legislation that follow on from that abolition. They will ensure that the tax rules and regulations are consistent and are aligned with each other.

By way of background, some pension schemes provide a pension that replaces all or part of the additional state pension, which is sometimes referred to as the state second pension. When people join one of those schemes, they are said to be contracted out of the additional state pension. Members of such pension schemes pay a lower rate of national insurance in return for giving up their entitlement to the additional state pension. To help to simplify the pension system, the Government are ending that facility.

The first stage of the process was the abolition of contracting out of the state second pension on a defined contribution basis. The previous Government announced on 12 March 2010 that contracting out on a defined contribution basis would be abolished from 6 April 2012, and the present Government confirmed that that would happen. The second stage of the process will be to abolish contracting out for members of defined benefit pension schemes. At Budget 2013, the Chancellor announced that that would take effect from 6 April 2016. Those changes are integral to the Government’s broader strategy of reforming the state pension with the introduction of a new single-tier pension from 6 April 2016.

Clause 51 will simplify pensions tax legislation and remove possible causes for confusion. It will remove or amend all provisions in the tax rules that refer to contracting out through a defined contribution pension scheme. I confirm for the hon. Gentleman that the clause refers only to defined contribution pension schemes, and it is not related to the Chancellor’s announcement in the Budget on defined benefit schemes. As I have explained, members of defined contribution pension schemes have not been able to contract out of the state second pension since April 2012, so no individual will be affected by this tidying-up exercise.

Secondary tax legislation contains additional references to contracting out on a defined contribution basis. We have consulted on draft regulations to remove or amend all provisions in secondary legislation that include such references, and those regulations will be introduced after the Bill has received Royal Assent. In addition, we anticipate making further consequential changes to pensions tax legislation in a future Finance Bill after contracting out for members of defined benefit pension schemes has been abolished.

I conclude by saying that clause 51 tidies up pension tax legislation by reflecting the fact that contracting out of the state second pension for members of defined contribution pension schemes was abolished from 6 April 2012.

Chris Leslie (Labour, Nottingham East)

We are making excellent progress. Will the Minister set out the predicted fiscal impact of the changes made in clause 51? I am not quite clear what that impact will be, and it would be helpful to have that on record. Have the Government assessed whether the changes will create difficulties in employer pension provision? Has any assessment been made of the availability of pension schemes over and above those available under the auto-enrolment arrangements?

Sajid Javid (Conservative, Bromsgrove)

The fiscal impact of the changes is expected to be nil. I will have to look into the hon. Gentleman’s question about auto-enrolment and get back to him.

Clause 52 - Overseas pension schemes: general

Chris Leslie (Labour, Nottingham East)

Clauses 52 and 53 introduce a series of technical arrangements on qualified recognised overseas pensions schemes, which have the wonderful acronym QROPS—I am not sure quite how that is pronounced. Will the Minister give us a sense of whether there will be any particular benefit from these clauses? I would like to hear the rationale behind them put on the record.

Sajid Javid (Conservative, Bromsgrove)

Individuals can transfer their pension savings in a UK-registered pension scheme to a QROPS, free of tax. The rules were designed to allow individuals who leave the UK permanently to continue to save for their retirement in their new country of residence. However, HMRC found that the QROPS regime was being used increasingly as a route to convert UK pension savings into a single lump sum payment to escape UK taxation. That was clearly unacceptable, so the Government published a statement explaining the policy intention of the QROPS regime on 6 December 2012.

The changes made by clause 52 strengthen the QROPS regime in a number of ways to ensure that it can be monitored more effectively and that the correct UK tax charges are applied. The clause specifies additional criteria that HMRC may use to exclude a scheme from being a QROPS, and also amends the powers to make regulations so that information will have to be provided by schemes that cease to be QROPS after the Bill receives Royal Assent. A new system of re-notification for QROPS will also be introduced.

Draft regulations were published for consultation on 24 May, and the consultation will close on 21 June. Subject to any amendments as a result of the consultation, the regulations will be introduced when the Bill receives Royal Assent.

If the hon. Gentleman has no other questions on the clause, I commend it to the Committee.

Clause 54 - Employee shareholder shares

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 56, in clause 54, page 27, line 5, at end insert

‘and provision for an exemption from income tax in connection with advice relating to proposed employee shareholder agreements.’

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss the following:

Amendment 51, in clause 54, page 27, line 5, at end add—

‘(2) The Chancellor of the Exchequer shall review the impact of this section on tax avoidance activity, and place a copy of this review in the Library of the House of Commons within six months of Royal Assent.’.

Clause stand part.

Government amendments 57 to 59.

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

David Gauke (Conservative, South West Hertfordshire)

Thank you, Mr Crausby. It is a great pleasure to serve under your chairmanship once again.

Clause 54 and schedule 22 introduce the tax reliefs that form part of the new employee shareholder employment status. The reliefs reduce the amount of income tax payable in respect of employee shareholder shares and exempt from capital gains tax income from up to £50,000 worth of shares received by each employee shareholder. The clause also provides consequential changes to corporation tax provisions. The measures will support the wider aims of employee shareholder status by providing a further incentive for individuals to take up the new status and by addressing some of the tax barriers that have arisen for businesses and individuals wishing to do so.

As I am sure the Committee will be aware, the new employment status was announced on 8 October 2012, and has been debated extensively as part of the Growth and Infrastructure Act, which received Royal Assent at the end of April. I am sure that you will be pleased to learn, Mr Crausby, that I intend to focus on the tax aspects of the policy set out in the Bill, although I would not be entirely surprised if some of the broader issues were also raised.

The clause and schedule 22 are divided into three main parts. Part 1 relates to the income tax treatment of employee shareholder shares when they are acquired. Part 2 relates to the capital gains tax treatment of the shares when they are disposed of. Part 3 concerns the availability of corporation tax relief when employee shareholder shares are awarded.

As set out last year, the Government will exempt from capital gains tax gains on up to £50,000 worth of shares acquired by employee shareholders. That will enable growing companies to attract and retain talented and entrepreneurially minded individuals by offering the opportunity for a potentially significant tax-free gain on shares in the company.

After last year’s announcement, the Government recognised that the tax treatment of shares awarded under employee shareholder status was causing concern to prospective users and could be a barrier for many who would like to be employee shareholders. We therefore announced in the Budget that the first £2,000 of share value would effectively be exempt from income tax or national insurance in most cases. That will ensure that most employee shareholders receiving only the minimum amount of shares will not be subject to any up-front tax charges.

The statutory corporation tax relief available to companies awarding employee shares is broadly linked to the operation of rules for taxing employment income, or the amount that is or would be taxable when the employee acquires the shares. The special income tax rules for employee shareholder shares mean that it is necessary to make consequential modifications to the corporation tax provisions. The modifications ensure that corporation tax relief is available for employee shareholder shares on the same basis as it is currently available in other cases in which an employer issues shares to an employee for no payment. All these tax reliefs are subject to certain conditions being met; in particular, there are a number of anti-avoidance provisions in the legislation to prevent misuse of the new status.

The Government expect that the new employment status will particularly benefit fast-growing small and medium-sized companies that want to create a flexible work force. It will, however, be open to all companies, although we recognise that it will not be appropriate for everyone. It is intended that the new status and associated tax reliefs will take effect from 1 September 2013.

I am well aware that the new employment status received scrutiny and criticism as the Growth and Infrastructure Bill passed through Parliament. The Government considered the comments made by peers in the other place and tabled a number of amendments. On 16 April, the Government introduced an amendment to make it clear that no one receiving jobseeker’s allowance could be obliged to take up an employee shareholder job offer. On 23 April, two further amendments were introduced. The first requires employers to provide a written statement of the details of the employee shareholder offer before it can be accepted; the second requires that the prospective employee be given seven calendar days to consider the offer before acceptance. A final amendment requires that an individual considering a job under the new status must receive independent advice on the terms and effect of the proposed employee shareholder agreement and that the employer should bear the reasonable costs of that advice.

Each of the amendments ensures that individuals considering the new status are well informed and cannot be forced into taking up employee shareholder status if they do not wish to do so. The status is a purely voluntary undertaking between employee and employer. The Government believe that the new employment status is an important measure that will stimulate business and entrepreneurial activity in a way that is fair and rewarding for those who agree to accept it and is attractive for fast-growing companies that wish to use it.

I turn now to amendments 56 to 59. Section 31 of the Growth and Infrastructure Act 2013 requires that an individual considering whether to adopt the new status must receive independent advice on the terms and effect of any new employee shareholder agreement; reasonable costs of that advice must be met by their employer. Under normal tax rules, that could create a benefit or receipt that is taxable on the individual as employment income, although the exact tax consequences would depend on the particular circumstances of the individual and the advice provided. The Government amendments provide certainty to prospective employee shareholders that they will not face a tax bill for receiving that advice. I can also confirm that corresponding changes to the NICs regulations will be made to ensure that neither employee nor employer NICs will be due on the cost of the advice.

Amendment 51, tabled by the Opposition, calls for a review to be conducted and placed in the House of Commons Library, this time on the potential impact of the clause on tax avoidance activity. I am aware that there are some concerns that the new status will introduce avoidance risks into the tax system. We have already looked to respond to those concerns, while keeping the operation of the new status as simple as possible for employers and employees to use.

In particular, the legislation contains a number of provisions aimed at preventing abuse of the new status. For example, there are rules that will stop people with a material interest in a business from exploiting the tax reliefs for the benefit of themselves or their families and to prevent tax advantages applying where there is multiple use of the status through connected companies.

The Government have also published a tax information and impact note on the HMRC website, which includes an assessment of the expected impacts of the tax changes covered by the clause. That is in addition to the impact assessment published by the Department for Business, Innovation and Skills on employee shareholder status. In any case, it would not be appropriate to publish a further document to the time scale proposed. The new status aims to enable employees to benefit from the company’s long-term growth. It is not due to come into force until 1 September.

The capital gains tax relief will apply only when employee shareholders sell their shares. In many cases, we expect that to be some time later, especially as we believe that many employee shareholders will want to retain shares over the long term to benefit from the growth to which they are contributing. It will, therefore, take some time for meaningful information on the take-up and the use of the status, and its tax reliefs, to become available; it will certainly not be available after six months.

Nevertheless, in both what we have said and done as a Government, we have made clear that we find aggressive tax avoidance and tax evasion unacceptable. Should it become apparent that the new status is subject to particular forms of abuse, we will take the appropriate action. I therefore ask the hon. Members from the Opposition to withdraw their amendment.

In conclusion, the tax relief set out in the clause and schedule forms a key part of the new employee shareholder status, which fosters employees’ commitment to the success of their employer and reduces burdens on business in a new and innovative way. I hope that amendments 56 and 59 will be accepted and that the clause and schedule may stand part of the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As the Minister outlined, the clause introduces schedule 23, and both concern the tax treatment of employee shareholder shares, a rather strange measure created by section 31 of the Growth and Infrastructure Act 2013. The provisions exempt any capital gains on the disposal of up to £50,000 worth of shares, acquired by employee shareholders under their employee shareholder agreement, from capital gains tax. The Minister also outlined how the clause works and he introduced the Government’s amendment to it.

As members of the Committee will be aware, however, and as the Minister acknowledged, there has been a lot of opposition to the measure. As the official Opposition, we very much oppose it because we object to the notion of linking the concept of employee ownership, which we support, with employees being expected to give up their basic rights in the workplace.

We also have serious concerns about the measure’s implications in terms of tax avoidance. Those concerns are shared by a wide variety of organisations and individuals across the political spectrum.

Paul Uppal (Conservative, Wolverhampton South West)

If the hon. Lady does not accept the argument on share ownership, is she not moved by the announcement made at the weekend by the right hon. Member for Morley and Outwood (Ed Balls) that a future Labour Government—if the country had the misfortune of that—would announce a cap on the state pension? Essentially, people are looking for financial security and this measure will help secure the financial future of many workers.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Without doubt, Mr Crausby would rule me out of order if I delved into such broad policy areas that do not relate to the specific measures that we are considering. The hon. Gentleman makes light of the measures, but they are deeply concerning and I will explain why. I am surprised he is not taking the potential implications of the measures more seriously.

Stephen Doughty (Labour, Cardiff South and Penarth)

My hon. Friend mentions the opposition from across the political spectrum. Was she not surprised to read the comments from Lord Forsyth in the debate in the other place? He said:

“Frankly, I am surprised that this clause has survived so long. The scheme is ill thought through, confused and muddled.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 597.]

It has,

“the trappings of something that was thought up by someone in the bath...It is a foolish measure”. —[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 614.]

That was said by a Tory former Minister with responsibility for employment.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank my hon. Friend for his intervention. We could detain the Committee all day by reading out quotations from the wide spectrum of people, organisations and indeed former Conservative Ministers and Cabinet members in the Lords who have deep concerns about the measure. That is also why we are disappointed that our amendment 53 and new clause 3 were not selected for debate. We feel strongly about the policy and its impact on employment rights.

Amendment 51, which we are considering now, asks the Government to review the overall impact of the measure specifically on tax avoidance activity. It is critical that the Treasury monitor it very carefully. As Committee Members know, the policy of employee shareholders shares, more commonly known as “shares for rights”, was first announced by the Chancellor of the Exchequer at the Conservative party conference in October 2012. I will quote from his speech:

“Today we set out proposals for a radical change to employment law. I want to thank Adrian Beecroft for the work he has done in this area. This idea is particularly suited to new businesses starting up; and small and medium sized firms. It’s a voluntary three way deal. You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the Government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for. Owners, workers, and the taxman, all in it together. Workers of the world unite.”

I hear muttering.

It would be faintly amusing were the idea itself not so appalling. My hon. Friend the Member for Cardiff South and Penarth has already quoted the Conservative peer and former Minister with responsibility for employment, Lord Forsyth, who described the idea as

“positively dreadful”

with

“all the trappings of something that was thought up by someone in the bath.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 613-614.]

Of course, perhaps knowing perfectly well that the proposal had virtually no backing, the Chancellor’s announcement on 8 October was followed very rapidly by a consultation, which opened on 18 October and closed just three weeks later on 8 November. The Growth and Infrastructure Bill containing the proposal was published on the same day that the consultation closed, which says everything we need to know about the Government’s intention to actually listen to the consultation and act on it.

Despite overwhelming opposition, with fewer than five out of the 209 organisations that managed to respond to the consultation in the time permitted saying that they were in favour of the idea, the Government ploughed on anyway. Thus, in relation to the tax treatment of employees, the Chancellor confirmed in the 2012 autumn statement on 1 December—some would consider that winter rather than autumn—that they were,

“considering options to reduce income tax and NICs liabilities that arise when employee shareholders receive shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive.”

The measure was subsequently included at Budget 2013.

The employee shareholder status was originally due to be implemented in April this year, but—as the Minister outlined and the Red Book indicates—it has already been pushed back to September. It is therefore important to understand exactly what it will mean in practice. In return for paying no income tax and NICs on the first £2,000 of any shares and being exempted from capital gains tax on the first £50,000, employees will give up the right not to be unfairly dismissed, the right to a redundancy payment, the right to request flexible working and the right to leave for study or training and will have to give 16 weeks’ notice rather than the normal eight weeks before returning to work from maternity leave or adoption leave. It is worth noting that the latter two will disproportionately impact female employees, which is somewhat begrudgingly noted in the tax information and impact note.

I want it to be absolutely clear that the Opposition do not oppose the concept of employee ownership. Such schemes have significant benefits for both employers and employees, but we strongly object to the idea being linked to the removal of employment rights. The Employee Ownership Association also takes that view and has said:

“The decision to allow [Section 31] of the Growth Bill, in which worker rights on such matters as redundancy and unfair dismissal have to be sacrificed by employees in order for them to be allowed an ownership stake in the business in which they work, is hugely disappointing.

There is absolutely no need to dilute the rights of workers in order to grow employee ownership and no data to suggest that doing so would significantly boost employee ownership. All of the evidence is that employee ownership in the UK is growing and the businesses concerned thriving because they enhance not dilute the working conditions and entitlements of the workforce.”

Liberal Democrat peer, Baroness Brinton, made a similar point on Report during the passage of the Growth and Infrastructure Act 2013:

“Morale is important because while the shares in an SME are unlikely to yield high returns in the first few years, if any at all…after a company is founded, especially during this period of low consumption and investment, it has to find ways of motivating employees to help get the business off the ground.”

Paul Uppal (Conservative, Wolverhampton South West)

Will the hon. Lady give way?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I will just finish quoting Baroness Brinton:

“It might offer flexible working hours and shares without links to a cut in employment rights. The founders of such firms have been offering shares without any removal of rights for years, and it works. Why would they take up a proposal that destabilises the employee and the company?”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 606.]

Paul Uppal (Conservative, Wolverhampton South West)

For the sake of clarification, my initial intervention was not flippant in any way; I am quite serious about this. I have run my own business, as have many members of my extended family, and having people come to work but not visualising it as such is always effective. Expanding the idea of employee ownership—there is always an element of trust—creates an environment that is conducive to people feeling that they have a connection. Rather than being employees, they feel that they are employers as well. It creates a relationship of trust.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I accept the premise of the hon. Gentleman’s point, but he seems to ignore my point and the point that Baroness Brinton, whom I was quoting, was making. In the experience of the organisations that fed back on the proposal, that trust and feeling of shared ownership is better achieved when there is no trade off against employment rights. Indeed, Lord O'Donnell, the former head of the civil service, said:

“If an employer is offering this, they are probably the kind of employer that you do not want to go near. If an employee accepts it, it is probably because they do not really understand what they are doing. On those grounds, it is bad.” —[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 617.]

The former Conservative Cabinet member, Lord King of Bridgwater, also remarked:

“As soon as I heard the announcement of this proposal and of the brief period of consultation which would take place on it—and I understand that 92% of those who responded to the consultation were against the proposal—I carried out my own consultation. I have not found anybody yet who is in favour of the proposal or who says that they think that they will use the provision.” —[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 611.]

Many concerns have been expressed by many business organisations about this risible idea. I give credit to the hon. Member for Wolverhampton South West for his loyalty in trying to defend the Government’s measure, but few companies or business organisations understand the rationale for the measure or what the Government hope to achieve with it. It is little wonder that the Government suffered two embarrassing defeats in the other place, on the independent legal advice that would need to be given in return for employees giving up their shares and on the cooling-off period. They are both vital concessions, but the Opposition do not consider them to be enough.

Lord Bishop said:

“Permitting companies to purchase certain rights in this way seems ethically wrong in principle. It is foremost the precedent of allowing employment rights to be bought and sold like a commodity that…must be rejected. Basic safeguards against unreasonable employer behaviour should not have a price tag attached to them.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 609.]

Perhaps the most cutting comment of all was made by Lord Deben, who simply stated,

“I cannot imagine any circumstances whatever in which this would be of any use to any business that I have ever come across in my entire life.”—[Official Report, House of Lords, 6 February 2013; Vol. 743, c. 293.]

There are serious concerns about exactly how this divisive measure will benefit employers and employees, about how it undermines the employee ownership model, about the pressure that existing and new employees may come under to participate, and about what will happen to those employees who took up this option when the going gets tough for a firm.

I will focus on the implications of the clause for the Exchequer. The 2012 autumn statement policy costings assume that the overall cost to the Exchequer of the measure will be £20 million in 2016-17, rising to £80 million in 2017-18. The costings note that

“The main uncertainties are around assumptions on take up rates, the average value of shares that are entered into the scheme, the extent of tax planning and the timing of disposals.”

In its certification of the costings, the Office for Budget Responsibility said:

“there are a number of uncertainties in this costing. The static cost is uncertain in part because of a lack of information about the current Capital Gains Tax arising from gains on shares through their employer. The behavioural element of the costing is also uncertain for two reasons. First, it is difficult to estimate how quickly the relief will be taken up; this could make a significant difference as the cost is expected to rise towards £1 billion beyond the end of the forecast horizon. Second, it is hard to predict how quickly the increased scope for tax planning will be exploited; again this could be quantitatively significant as a quarter of the costing already arises from tax planning”.

In contrast, the Government’s impact assessment of the measure, published belatedly after the consultation closed, made no mention of either tax planning or the potential £1 billion cost to the Exchequer. That issue was highlighted by the director of the Institute for Fiscal Studies, Paul Johnson, in a Financial Times article aptly entitled “Shares for rights will foster tax avoidance”. He wrote:

“There may be a case for more flexible approaches to employment legislation. But as a tax policy, ‘shares for rights’ always looked pretty questionable. At a time of increasing scrutiny of tax avoidance schemes, it has all the hallmarks of another avoidance opportunity.”

He went on:

“So, just as concern over tax avoidance is at its highest in living memory, just as government ministers are falling over themselves to condemn such behaviour, that same government is trumpeting a new tax policy that looks like it will foster a whole new avoidance industry. Its own fiscal watchdog seems to suggest that the policy could cost a staggering £1bn a year, and that a large portion of that could arise from ‘tax planning’.”

Of course, the scheme may well have the apparently unintended consequence that employee shareholder shares may be used for senior employees or executives in management buy-out situations, or more generally to access tax reliefs, provided the material interest provisions do not block their availability. For senior executives, shares with a low up-front value and significant potential for upside could be used to take advantage of the tax reliefs, while at the same time statutory rights foregone may just be written into senior employees’ and executives’ contractual documents.

It is bad enough that the policy is divisive and damaging and undermines the notion of employee ownership, but it could cost the Exchequer up to £1 billion, with a quarter of that arising from tax planning or tax avoidance activity. How will the Government ensure that the measure benefits ordinary workers and not just those senior employees and executives at the top? Given the Government’s tough talk about clamping down on tax avoidance, it will be particularly helpful if the Minister addresses those points.

Further concerns about the practicalities of the scheme for business and how it will be managed by HMRC have been raised. The Chartered Institute of Taxation has expressed concern about the impact on small, unquoted companies, which is especially worrying given the Chancellor’s original announcement that the policy would be “particularly suited” to new businesses and SMEs. For the scheme to operate, the value of any shares will need to be agreed before being issued; as the CIOT has pointed out, that is particularly important as the shares must be valued at more than £2,000 for the scheme to be engaged. If the shares allocated prove to be worth £1,999, the income tax and national insurance contributions exemptions will be lost, so valuation is clearly critical to how the measure will function.

Can the Minister explain how that is to be done in a timely fashion for small, unquoted companies? Will it involve HMRC’s share valuation unit? If so, what plans do the Government have in place to ensure that this unit is sufficiently resourced and that demand and expectations for share valuation agreements are managed? What thought have the Government given to how the scheme relates to company law restrictions on issuing shares for less than their nominal value? There may be an argument that entering into an employee shareholder agreement represents payment of a nominal value for the shares, and therefore the company law restrictions do not apply. Clearly, though, public companies would need to secure an independent valuation for this purpose. Otherwise, if entry into the employee shareholder agreement is not regarded as adequate consideration for the nominal value of the shares, a company will need to have sufficient profits available for distribution, which it can apply to issue shares to the employee without breaching company law, which will add further complexity to the Government’s measure.

A further concern expressed by the CIOT about the operation of the scheme relates to share buy-back where there is not a ready market for the shares, which it says will be “difficult for many companies”. The Government’s summary of responses to their consultation states:

“the Government believes that sufficient mechanisms already exist for employers to sell shares to their employees and for employees to buy and sell them back to the company.”

However, both the CIOT and the Office of Tax Simplification regard that as questionable, so I would be grateful if the Minister replied to those concerns as well.

Finally in relation to the operation of the scheme, the CIOT has drawn attention to what happens to old shares that are exchanged for new shares as part of a company reorganisation. The legislation on the measure suggests that new shares will cease to be exempt from capital gains tax, which the CIOT describes as

“a surprising outcome when the employee has not realised any value from the shares.”

Will the employee be deemed to have acquired the new shares at the open market value, plus the gain on the old shares, so at least any gain accruing from the old shares prior to the exchange is effectively exempted from capital gains tax? If not, will the value in having employee shareholder shares be lost?

In conclusion, I return to the thoughts of the former Employment Minister and Conservative peer Lord Forsyth. When asked about the proposal back in October on the BBC’s “Daily Politics” he replied:

“I couldn’t work out what problem”—

the Chancellor—

“was trying to solve. If the problem is that people want to take on workers but they’re not sure—particularly young workers—and they’re worried that if they take them on they will be very expensive to fire them, because they’ll threaten to go to a tribunal—legal costs will be enormous—I don’t see how having a scheme to give them shares in the business if they give up their employment rights is going to be in the interests of the employer or the employee, because they end up with shares in an unquoted company which they can’t deal with, and the incentive is apparently that there will be a benefit because you won’t have to pay capital gains tax. Well everybody’s got a £10,000 gains tax allowance before they have to pay any capital gains, so that doesn’t seem to be much of an incentive.”

He finished as he started, concluding:

“I just wonder what problem he is trying to solve.”

Eight months later, we still do not know what problem the Chancellor is trying to solve with the measure, yet grave concerns remain about its impact, particularly on employment rights and on tax avoidance activity.

Ian Mearns (Labour, Gateshead)

I wonder whether Government Members expect the inducement to a new member of staff in some of those schemes to be shares worth massively more than £10,000.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I think we are all pondering exactly what the intention is and what Government Members are thinking in supporting a measure that has been roundly criticised as rather hare-brained. I would be grateful if the Minister responded to those concerns and to our reasonable amendment calling for a review of the impact of the measure on both individual rights and on tax avoidance activity, which is a key concern for everyone in the country and should be the key concern for the Treasury at the moment.

David Gauke (Conservative, South West Hertfordshire)

I will focus most of my remarks, as the hon. Lady has, on tax avoidance and cost, but I want to respond to her more general comments and refer to the purpose behind the measure.

We received many representations from businesses that are concerned that the actual and potential costs of employment rights can be a deterrent to taking on staff. Employee shareholder status is one way of addressing those concerns and of furthering the Government’s objective of increasing employee involvement in the success of their employers. We are taking a host of other measures to support the objective of employee ownership. From next year, we will provide £50 million annually to further incentivise growth in employee ownership, in response to the Nuttall review. From 30 April, we relaxed rules that apply where certain companies purchase their own shares, for example, as in employee share arrangements. At the Budget, we announced capital gains tax relief for the sale of a controlling interest in a business to an employee ownership structure, which will be introduced in 2014. We have also arranged for the introduction of a model trust deed, which businesses can use if they wish to move to an indirect model of employee ownership. This measure therefore has to be seen as part of a wider agenda to make employee ownership more attractive, which I hope is supported by all parties.

Stephen Doughty (Labour, Cardiff South and Penarth)

The Minister mentioned the businesses that are in favour of the scheme. How many businesses did he hear from that are interested in taking up the scheme or think it is a good idea? Does he have a specific figure or perhaps some examples to share?

David Gauke (Conservative, South West Hertfordshire)

I will quote the chairman of the Federation of Small Businesses, John Walker, who said:

“We believe it will promote share ownership and loyalty to those companies which offer this initiative, with potential benefits following in terms of greater productivity.”

The director general of the British Chamber of Commerce, John Longworth, said:

“The plans would particularly aid new and fast-growing businesses.”

Simon Walker of the Institute of Directors said:

“This scheme has the potential to reduce...burden[s] on companies and make employees better off at the same time.”

Just to complete the point, not long before the announcement was made, I met an overseas business that was looking to expand in Europe and was deciding where they should do so. They raised two concerns, entirely unprompted, about the UK: one was the costs incurred due to employment rights, and the second was that the UK’s share incentive regime was not as generous as they would like. That is a specific case I know about—I will not name the company. That is part of the concern that we seek to address, to make the UK an attractive place.

No one is arguing that this is the right mechanism for all businesses. It is worth stressing that it is an entirely voluntary arrangement, both for businesses and individuals. It will not suit everyone, but that is not a reason to deny the option to those who do want to use it.

Stephen Doughty (Labour, Cardiff South and Penarth)

The Minister quotes the FSB, but he will recall that the FSB said that the scheme was unlikely to be appropriate for many small businesses. I want to press him again on this point. One would expect, if it were such a great thing, a clamour from businesses writing to the Government, inside and outside the consultation, to say that they want to see it go ahead. Can he give us a figure of the number of businesses—as opposed to representative organisations—that wrote in? If he does not have the figure, perhaps he could write to the Committee and tell us how many.

David Gauke (Conservative, South West Hertfordshire)

I do not disagree, if the hon. Gentleman is arguing that the FSB says it is not appropriate for lots of small businesses. It is not appropriate for every business. We are arguing that it is appropriate for some businesses. Being inappropriate for many businesses does not mean that it will not be appropriate for some—for example, a fast-growing business with staff who want to commit to the business, or an entrepreneurial undertaking where it may not necessarily work, but there is a group of people who together want to make it work. This measure would provide a degree of flexibility. I will give way to my hon. Friend who knows something about business.

Brooks Newmark (Conservative, Braintree)

I remain perplexed about why the Opposition continue to baulk at this proposal. I congratulate the Government on the initiative because it is about giving individuals choice. Does the Minister agree with the point made by my hon. Friend the Member for Wolverhampton South West? The measure gets employees to think a little bit more like owners. Aligning interests with ownership will help build a company, because people will think more like owners and less like employees. To emphasise the Minister’s point, no one is twisting an employee’s arm to take this on, and no one is twisting a company’s arm to adopt the scheme.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend is right on both points, which he put well. It is worth bearing in mind that there are arrangements whereby people are employees and have a full range of employment rights. There are also circumstances whereby somebody may be self-employed, perhaps a partner in a firm, in which they lose pretty well all their employment rights.

The proposal would create a new arrangement that is somewhere between those two situations. An employee will potentially be more like an owner and, in those circumstances, one would expect there to be some changes to employment rights. It is also worth pointing out, however, that employee shareholders will continue to enjoy many important statutory rights, such as the right to paid holiday, protection from discrimination at work and a safe environment.

I underline the point made by my hon. Friend the Member for Braintree. Whether a person is a prepared to give up the specific rights involved will be a decision for them, based on their own circumstances and the terms offered by the employer company.

We have introduced several safeguards to ensure that anyone considering an employee shareholder offer will receive full details of what that involves as well as independent advice.

Let me deal with the costs. The hon. Member for Newcastle upon Tyne North raised the OBR estimate of a £1 billion cost. It is worth pointing out that the OBR has certified the costs of the tax reliefs attached to the new status. In total, the reliefs are expected to cost £120 million by the end of the scorecard period in 2017-18. That is made up of £45 million for the CGT exemption and £75 million for the income tax and national insurance contribution changes. We believe that those costs are proportionate in achieving the policy’s aims.

It is true that the OBR originally commented that the cost of the CGT exemption could rise towards £1 billion beyond the end of the forecast horizon. Those comments, however, require some clarification. First, the OBR was unable to take account of the anti-avoidance provisions now included in the Bill. Secondly, estimating the long-term costs of targeted measures like this is an inherently uncertain business. It depends on many factors, not least take-up, which the OBR notes is difficult to predict. Furthermore, any rise towards £1 billion would occur well beyond the end of the forecast period of 2017-18. In fact, the figure referred to by the OBR goes beyond the 2020s.

The figure of £1 billion taken in isolation simply does not tell the whole story. Best estimates of the cost of the CGT measure have now been refined and show it increasing to £45 million in 2017-18. It is also worth pointing out that the OBR’s more recent comments on the Budget costings again mention the uncertainties involved, but no longer provide any projected figures for the long-term cost.

As for the concerns about tax avoidance, the tax reliefs are intended to encourage the take-up of employee shareholder status by individuals where it is offered to them, but are not an end in themselves. There are a number of rules in the Bill to prevent abuse of the new status, while keeping it as simple as possible for employers and employees to use.

It would perhaps be helpful to the Committee, given the focus of the hon. Member for Newcastle upon Tyne North on tax avoidance, to look at some of the measures involved. There are rules to prevent those who are in a position to control a company from getting the tax reliefs if they control 25% or more of the voting power in the company. There are similar rules to prevent people connected to those who can control the company, such as spouses or children, from benefiting from the reliefs. Individuals cannot get multiple reliefs by entering two consecutive employee shareholder contracts with the same company or related companies. People will not be able to use company liquidations to realise their gains and then get more reliefs on new shares under the same control. We will require two years to pass between the liquidation of the company and the employee receiving further exempt shares in a related company. The Bill will prevent the manipulation of share values by, for example, placing restrictions on the values.

The issue of whether employers and employees will need to know the value of the employee shareholder shares and what HMRC will do to help them was raised. HMRC will consider and, where possible, confirm for tax purposes the share valuations that are put to it. It will do that before the shares are given as employee shareholder shares, and any confirmation will be valid for a specified time to allow the shares to be issued. That will provide certainty to both employer and individual that the shares meet the minimum value of £2,000 and confirm the values on which tax and reliefs can be calculated. HMRC provides an assurance service in real time to consider the share valuation provided by an employer. It is not a formal share valuation service. It ensures that an employer and a prospective employee shareholder can gain confirmation of value in a timely manner. Employee shareholder status is essentially an agreement between the employer and the employee, entered into with the full understanding of both sides.

I was also asked whether it was unfair if the capital gains tax exemption were lost as a result of an internal reorganisation or a takeover—the point about old shares to new shares. There will be a rebasing when new shares are received, but no CGT charge will be made at that stage. To put it another way, the tax exemption is not wholly lost when employee shareholder shares are involved in a reorganisation of share capital or takeover. Indeed, without the special rule that we are introducing, gains accruing before the reorganisation or takeover will be taxed in full when new shares are sold. That would be unfair, so we are making sure that gains attributing to the period between receiving the shares and the reorganisation or takeover on which the shares are surrendered will continue to be exempt from tax.

As for whether the measure will benefit only the wealthy, it is worth saying that it is designed to stimulate business and entrepreneurial activity. It is expected that it will appeal to a range of employees, particularly those working in fast-growing companies. It will give them a real and valuable stake in the future of the company for which they work, which could be well above the annual exempt amount for CGT purposes. I appreciate that the measure does not have the support of all members of the Committee, but it is a useful addition to the process in the United Kingdom. It will provide further flexibility and help fast-growing and entrepreneurial businesses. It will attract and retain staff, and I welcome it. The Government are pleased that we will have it in place.

Ben Gummer (Conservative, Ipswich)

My hon. Friend has made a persuasive speech. It is an interesting matter, and we have had an interesting debate. Can he comment on those directors who might misuse the measure? He put forward a positive argument about where it might fit into the general employment pattern in the United Kingdom. I used to work in the construction sector. Some of its elements attracted particular pond life, and I can imagine some people with whom I used to do business misusing the measure, if they chose to do so, by setting up sham companies, employing people in them, dissolving the companies and making use of the absence of employment rights to abuse their workers. That would be a misuse of what the Minister has convinced me is a good scheme. What will he be able to do to ensure that that does not happen and, if it does, that those directors are held responsible for their fraud?

David Gauke (Conservative, South West Hertfordshire)

I refer my hon. Friend back to a couple of issues, the first of which is that not all employment rights are lost in such circumstances. Employee shareholders will continue, for example, to have protection from discrimination at work and be able to work in a safe environment. Protections will be available.

Employees will also have provided to them a summary of the status and what it would involve. They would have the opportunity to consider it for seven days before accepting the arrangements. Some of my hon. Friend’s worry relates to the ability to misuse the measure as a tax avoidance arrangement, using liquidations to benefit again and again. There are sufficient protections in the Bill to prevent that from happening. There are steps designed to deal with such misuse.

The focus, and I suspect the take-up, will be on fast-growing businesses that want to ensure that they can incentivise their work force. I suspect that the type of sector that gets most use out of the measure will be technology companies, for example, that want to have a broad base of committed, well-motivated and incentivised staff who expect and hope that their business will expand rapidly and want to share in the gains. That is where we are coming from.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I appreciate the Minister’s sincere reply to the sincere and legitimate concern of the hon. Member for Ipswich. However, I have to dispute what he says about employees retaining sufficient rights, because they will lose the fundamental right that relates to unfair dismissal. The clue is in the title—a dismissal that is unfair. That is a fundamental right for an employee.

The Minister makes a good case for our amendment. If he is so confident about the types of business that will benefit from the measure and the way in which they will do so, I assume that the Government would want to keep a close eye to ensure that the Bill is being used for those purposes and that it is not being used for tax avoidance or abusive purposes. Therefore, I expect the Government to support our amendment.

David Gauke (Conservative, South West Hertfordshire)

I will conclude by returning to my earlier point about the weakness of amendment 51, given that the focus of the remarks is on tax avoidance and so on. The arrangement would provide an exemption related to CGT, which is paid on a capital gain, hence the title. It will take some years to have the details that the hon. Lady seeks. It will take some years for people to participate in the arrangement, for companies to grow and for a capital gain to be realised when somebody sells the shares. The idea that in six months, following Royal Assent, we will be in a position to make a full assessment of that is clearly wrong. That is one concern.

In addition, although I appreciate that Oppositions table amendments requiring reviews and Governments then by and large reject them, in this case, a review six months after the policy is introduced, given that it is a long-term policy whose effects will occur over the long term, would be a great mistake.

I hope that I have provided clarification for the Committee and persuaded my hon. Friend the Member for Ipswich. Members of his family can, in general, be persuaded on these matters if the case is put persuasively.

Schedule 22 - Employee shareholder shares

‘Part 3A

“Employee shareholder agreements

Clause 55 - SEIS: income tax relief

Brooks Newmark (Conservative, Braintree)

As the Minister will be aware, the seed enterprise investment scheme is dear to my heart, and I would to like to put on the record my thanks to Lord Young of Graffham and Rohan Silva in No. 10 Downing street for the work that they have done in creating such a great initiative. There is a great problem when it comes to raising finance in this country, particularly at the lower end where many companies rely on angel investors. SEIS turbo-charges the incentives for angel investors to provide capital to start-ups, where the need for money is greatest nowadays. The extra incentive, beyond the enterprise investment scheme, of 50% income tax relief on investments has been highly attractive. SEIS has been in operation for only a year, however, and every little bit extra that the Government can do to incentivise angel investors to provide capital is to be welcomed. For that reason, I would like to put on the record my support for clause 55, particularly subsection (4), which introduces the concept of the “on-the-shelf period”. The measure will give investors an extra opportunity to join in with the great initiative that the Government have provided.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It is an honour to follow the hon. Gentleman. Clause 55 makes clarifying amendments to the seed enterprise investment scheme requirements, which currently prevent off-the-shelf companies that are formed by company formation agents from using the seed investment vehicle. The Opposition of course support the provision of help for business start-ups; nothing is more important in the current economic circumstances, which continue to be extremely challenging. Confidence is absolutely key and is thin on the ground for many small businesses, which still have great difficulty accessing bank lending.

In last year’s Finance Bill Committee, we discussed at some length the continued problems with bank lending, as well as the countervailing issue of introducing supply-side measures when the fundamental problem in the economy is a lack of demand. I want to touch briefly on a couple of the issues raised in those debates, as this is a useful opportunity for the Minister to provide an update on progress. Committee members, who I am sure scour Hansard daily for this issue, will be aware of a recent answer by the Minister to a written parliamentary question on 11 March, which stated:

“No benchmarks or targets have been set.”

However, he explained that the Government have

“estimated that 300 completely new companies will benefit from SEIS in the first year. In total 1,000 companies will benefit from investment under the scheme.”—[Official Report, 11 March 2013; Vol. 560, c. 40W.]

An answer to an earlier parliamentary question given by the Minister in January showed that HMRC has approved investments totalling £7 million for about 85 companies. Therefore, given that the first year of the scheme’s operation has concluded, will he provide an update on that figure of 300? It might not be a target, but has it been met or exceeded? How confident are the Government that 1,000 companies will benefit and in what time frame? How much investment has HMRC approved under the scheme to date?

At the moment, the unemployment figures are deeply concerning: we have 2.52 million people out of work. Of those, 958,000 are young people and there is also a significant number of long-term unemployed. Will the Minister update the Committee on how many jobs have been created by SEIS approvals, and have the Government assessed how many jobs might be created through the scheme?

I appreciate that creating significant numbers of jobs is not the scheme’s intention—

Mr Newmark rose—

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Have I anticipated the hon. Gentleman’s intervention?

Brooks Newmark (Conservative, Braintree)

Yes. The hon. Lady makes a valid point: the scheme is attractive and it has attracted firms to participate. She might perhaps ask the Minister whether he has considered raising the cap, because there is a limit on the number of employees that a qualifying SEIS company may have—I believe it is about 25—that limits opportunities. Does the hon. Lady agree that there should not be an employee cap?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It would be useful if the Minister would reply to those comments. The scheme might not have the intention of creating jobs, but as the unemployment figures are deeply concerning those companies could provide a boost to sustainable private sector growth that would, I hope, create good quality, sustainable, decent jobs for many people.

On the question of the specific change to clause 55 and the use of shell companies, the tax information and impact note states clearly that this is a simplifying measure to ensure that:

“eligible companies will not inadvertently be disqualified from taking advantage of the regime, by virtue of having been established by a corporate formation agent.”

The decision—inadvertent or otherwise—originally to exclude off-the-shelf companies was strongly criticised by, among others, the Chartered Institute of Taxation, which welcomes the change made by this year’s Bill.

Queries have been raised, however, about why the amendment, which corrects what the Government effectively admit is an unintended trap, is not backdated to the start of the SEIS scheme, which would allow some SEIS users to climb out of the trap into which they might have inadvertently fallen. Will the Minister address that point? In that same regard, will he confirm what assessment the Government have made of the number of off-the-shelf companies that may have been inadvertently excluded from the scheme?

The impact note suggests that the change under the clause will have no impact on the Exchequer. Will the Minister outline how many additional companies the Government have assessed will benefit from the change?

Finally, Committee members will be aware that the shadow Minister for small businesses, my hon. Friend the Member for Chesterfield (Toby Perkins), launched a small business taskforce report entitled “An Enterprising Nation”. The findings of that report, commissioned by the Leader of the Opposition and the shadow Business Secretary and based on the work of the taskforce and its late chair, Nigel Doughty, suggested that SEIS was being hampered by the following important limitations:

“Founders are unable to invest their own money via SEIS...There is a disincentive for Founders with personal capital to deploy it into their own businesses. For those Founders without capital, ‘bootstrapping’ a business using salary income from another job is extremely expensive as only post-tax income may be invested…(S)EIS is only available for equity investments, not debt. This has two major disadvantages. First, it makes finance much harder to obtain for those businesses unable or unwilling to issue equity. Second, it creates an additional cost for start-ups because the legal work surrounding equity issuance is typically more expensive than simple investor debt contracts.”

The report recommend that SEIS tax advantages should be extended

“to debt investors (as well as equity) and company founders (as well as third parties). Extended (S)EIS would help individuals to use their pre-tax earnings from a salaried job elsewhere to fund their start-ups. To avoid the cash flow burdens of PAYE being paid and reclaimed much later, a one 28-day ‘rapid rebate’ process should be introduced to permit reclaim of PAYE taxes on income invested in (S)EIS eligible businesses.”

I would be grateful if the Minister can address those concerns, and outline whether the Government intend to make the changes recommended by the Opposition’s small business taskforce.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, clause 55 makes changes to the seed enterprise investment scheme. It amends the legislation to ensure that companies established by corporate formation agents are not inadvertently disqualified from taking advantage of the scheme. The Government are committed to ensuring optimal take-up of SEIS by companies that can benefit, and they have responded quickly to correct the flaw in the legislation.

Before I deal with the details of clause 55 I will give a little background to it. SEIS was introduced in the Finance Act 2012, and was intended to help young start-up companies gain access to vital seed funding. It offers generous tax reliefs to individual investors to help channel funding into those companies. There was a good uptake in its first year, and nearly 2,000 companies have expressed an interest in using the scheme.

As of last Friday, HMRC has approved 466 companies, which together have raised almost £33.5 million. The average investment per company is about £71,000. Companies cannot apply to HMRC for approval until they have either spent 70% of the moneys raised or have traded for at least four months. Consequently, those figures do not capture all investment made to date under the scheme.

The Government initially anticipated that 300 new companies would benefit from the scheme. The figure of 466—it is likely to be higher than that—is clearly better than that. I do not know how much of that we can attribute to the efforts of my hon. Friend the Member for Braintree, who has been extraordinarily active in promoting SEIS, but undoubtedly we can attribute some of it to his work—[Hon. Members: “Hear, hear.”]Perhaps all of it. I thank him for his efforts in promoting SEIS.

Brooks Newmark (Conservative, Braintree)

While I appreciate my hon. Friend’s acknowledgement of my efforts, I would really like him to join me in acknowledging Lord Young of Graffham, whose idea this was. It is an inspirational idea, so will my hon. Friend join me in congratulating Lord Young?

David Gauke (Conservative, South West Hertfordshire)

As ever, my hon. Friend not only makes an outstanding contribution in this field, but does so with such modesty. I would like to put on the record my thanks to Lord Young for his efforts on this issue.

At this point I should perhaps deal with the issues that have been raised about employment, having given the take-up numbers. My hon. Friend is correct that there is a limit of 25 employees for SEIS. The existing EIS is there for larger companies with more employees—its limit goes up to 250 employees.

The hon. Member for Newcastle upon Tyne North asked how many jobs have been created as a consequence of SEIS. HMRC does not monitor the level of jobs created. To be fair, we are talking about early-stage companies, so they may not necessarily employ large amounts of people as yet. However, they could, of course, go on to do so. The scheme is part of our efforts to ensure a strong recovery in private sector jobs. Members of the Committee will be aware of the remarkable progress that we have made on that front over the past three years.

The legislation was designed so that companies owned by another company from the point of their incorporation are excluded from participating in the scheme. That feature is intended to prevent established trading companies from temporarily spinning off subsidiaries to allow investors access to the generous tax reliefs on offer. However, it will also disqualify companies that have been established by a corporate formation agent before being sold to their ultimate owners. That is a fairly common way for companies to begin life, and a number of interested stakeholder bodies and individual companies have raised it as an issue.

The exclusion of so-called off-the-shelf companies is unintended and inhibits otherwise eligible companies from benefiting from the scheme. Clause 55 corrects the unintended exclusion to ensure that the scheme benefits as many start-up companies as possible. The changes made by the clause will amend the existing legislation to ensure that a company owned by another company from incorporation will not be excluded, providing that the company has issued subscriber shares only and has not yet commenced any trade or other business.

The clause takes effect in relation to shares issued to individual investors on or after 6 April 2013, which is the start of the tax year for individuals. It does not take effect from April 2012 because we believe that quite a number of companies have already restructured their activities in order to comply with the existing legislation, and it would be unfair on those companies for the amended legislation to have retrospective effects.

On the number of companies caught by the flaw in the original legislation and how many more will now benefit, we believe that only a very small number have been caught—the majority were able to restructure to take advantage of the scheme—and the amendments made by clause 55 will make it easier to benefit without restructuring, rather than increasing the numbers anticipated to use the scheme.

A couple of more general points were raised about the application of SEIS. In particular, I was asked why debt finance cannot qualify for the tax relief and why founders cannot benefit. On debt finance, debt is lower risk than share capital and therefore does not justify the very generous tax relief attached to SEIS. We want to ensure that that is properly focused.

There is a similar point to make with regard to why founders cannot benefit. The incentives are intended to increase external investment to help grow and develop companies. Relief is not available for those who own more than 30% of the company, and that reduces scope for abuse. Entrepreneurs’ relief provides founders with benefit by giving a capital gains tax rate of 10%, which should not be forgotten. The focus of the very generous reliefs involved within seed EIS are external investors who would otherwise be making perhaps a high risk investment and who would not necessarily have all the information to hand in order to make an assessment as to whether that is a sensible investment. So there is a degree of asymmetry of information, but that argument does not really apply when it comes to founders who will be well informed.

In conclusion, the Government launched SEIS in the Finance Act 2012 to help start-up companies raise vital early financing. The clause corrects a minor issue with the legislation to ensure that all companies that should be able to benefit can benefit, and I hope that it can stand part of the Bill.

Clause 56 - SEIS: re-investment relief

Brooks Newmark (Conservative, Braintree)

Again I would like to reiterate my support for seed EIS and the particular aspect of reinvestment relief. The idea behind reinvestment relief is to turbo-charge the incentives that people have to step up to the plate with this particular opportunity. The idea was that in the first year of seed EIS, angel investors would get not only 50% of their income tax but this idea of roll-over relief. If they made a capital gains, they could then reinvest that in year one and get an extra 28% on the relief for making an investment, thereby taking up the relief to 78% on a particular investment. As the Minister is well aware, over the last six months of last year, particularly over the summer, I travelled to 14 different cities promoting that concept. One of the points made to me was that during its introduction the message did not get off the ground and into the market as fast as it could have done.

Several entrepreneurs have asked why the reinvestment relief was not given for a longer period. I congratulate the Government on listening to what business people have said and extending that roll-over relief on reinvestment, but will the Minister tell us why he is only allowing 50% of it rather than 100% this year, given that such important schemes take time to get out into the market? I encourage the Government to let another full year go by where 100% rather than 50% of the qualifying funds reinvested get the relief. Perhaps the Minister could address that point as well.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Again it is a pleasure to follow the hon. Member for Braintree. He raised the question that I wanted to put to the Minister, so I too would be grateful for a reply. Obviously, the measure was originally introduced in 2012-13 and has been extended to cover the gains accruing to the investor in 2013-14, but it provides that only half of the invested amount can be set against chargeable gains. Will the Minister clarify the thinking behind that reduction and tell us what assessment has been made? I appreciate that, in response to the discussion on the previous clause, the Minister explained the number of companies that have been improved and the current investment rates, but have the Government anticipated a slowing up or a reduction as a result of the reduced reinvestment allowance? It would be helpful to the Committee if the Minister could respond to those issues and those raised by the hon. Member for Braintree.

David Gauke (Conservative, South West Hertfordshire)

Clause 56 provides for a limited extension of the capital gains tax holiday component of the seed enterprise investment scheme. The change will help to ensure that the momentum the scheme has built up during the past year continues and that more investors take advantage of the tax reliefs, and put their money into young, start-up companies.

As we have heard, SEIS was introduced by the Government last year to provide vital financing support for start-up companies. The scheme is proving to be successful. It has received nearly 2,000 expressions of interest from companies seeking to have official assurance that they can use it. On top of the headline 50% income tax relief, the scheme was introduced with a one-year capital gains tax holiday to give it a kick-start and to build interest, and it is that element that will be extended under the clause.

The Government are keen to maintain the momentum—I gave some figures a moment ago—and continue to channel more funding into start-up companies. We are therefore extending the CGT holiday under the clause at a limited rate for another year to gains realised in 2013-14. We regard that as a sensible approach. It means that investors making capital gains in 2013-14 will receive a 50% capital gains tax relief when they reinvest those gains into seed companies in either 2013-14 or 2014-15.

I was asked why we are not continuing the 100% holiday. The CGT holiday was always set out as a temporary measure to kick-start the scheme and create a buzz—that is not a technical tax word. The scheme has worked well and it is picking up some real momentum and interest.

It is also fair to say that we recognise that a full CGT exemption allowed some investors, albeit in fairly unusual circumstances, to benefit from more than 100% tax relief. That could have been damaging to the scheme’s reputation in the long term. We therefore believe that a 50% CGT relief in the second year of the scheme strikes a good balance by offering support to a relatively new scheme without providing over-generous tax incentives. As we are now more than a year on in the life of SEIS and given that awareness increases over time, not least because of the excellent activities of my hon. Friend the Member for Braintree and the efforts of Lord Young, we consider a 50% rate of CGT for the second year strikes the right balance.

In conclusion, the clause provides a limited extension to the capital gains tax holiday component of SEIS. The changes will continue to help momentum in investment in SEIS, thereby ensuring more investment in young, innovative start-up companies, and I hope that the clause will be accepted.

Clause 57 - Disincorporation relief

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss clauses 58 to 60 stand part.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clauses 57 to 60 introduce provisions for disincorporation relief following the Office for Tax Simplification report, published in February 2012 as part of a series of reports into the small business tax. As Committee members know, it is a simple matter for an unincorporated business to change from being a sole trader to a partnership, or vice versa. It is also relatively simple to incorporate an unincorporated business, although tax planning is required to minimise disadvantages. However, the Office of Tax Simplification report highlighted that a small number of incorporated businesses operating as limited companies would prefer to operate in an unincorporated form and that various tax charges and administrative issues could be the factor discouraging them from doing so. The purpose of clauses 57 to 60 collectively is therefore to provide a disincorporation relief and so remove those disincentives. I am sure the Minister will give us some more detail on the clauses.

A number of issues have been raised that it will be helpful to put to the Minister before he makes his remarks so that he can address them. The tax information and impact note indicates that around 610,000 businesses will be eligible for the relief. Has there been an assessment of how many businesses will actually take up the measure? It seems to be a step about which businesses may require significant advice; what guidance will HMRC—or BIS, for that matter—be issuing for potential users of the scheme?

It has been suggested that the £100,000 asset limit could substantially restrict the number of businesses that will be able to take up the relief; indeed, the Chartered Institute of Taxation has suggested that most businesses owning land and buildings will comfortably exceed the £100,000 threshold and therefore recommends that the threshold be reconsidered or, at the very least, be kept under regular and compulsory review during the five-year period the relief is intended to run for. Will the Minister confirm whether that suggestion has been considered, and whether it will be implemented?

Will the Minister also outline what will happen to those businesses that take steps to disincorporate but then find that HMRC values their assets at more than £100,000—what will be the impact on their tax bill in those circumstances? The impact note suggests that HMRC may require additional resources to administer the relief; will the Minister clarify what assessment has been made of the resource requirements within HMRC? We are very conscious of the staffing reductions at HMRC; has appropriate consideration been given to resources before placing additional burdens on HMRC?

Both the Chartered Institute of Taxation and the Association of Taxation Technicians have expressed concerns that the relief is not to be extended to tax charges that might arise on shareholders as a result of disincorporation. As a consequence, it is thought that the restrictions will very substantially limit the take-up of the relief, and that many small businesses will continue to be operated through limited companies despite the fact that they do not need the commercial protection of limited liability. If that occurs, an opportunity for simplification of the tax system for small businesses will have been missed. Given that many members of the Committee, particularly on the Government Benches, would not like to see that happen, will the Minister explain the rationale behind the Government’s decision in light of the concerns that have been raised?

David Gauke (Conservative, South West Hertfordshire)

Clauses 57 to 60 introduce a new disincorporation relief, which has effect from 1 April 2013 and is available for five years. The relief will make it easier for business owners to move their business to a sole trader or a partnership by removing some of the tax charges.

I will begin with a little background to the measures. Disincorporation is the term we use to describe a transfer of a limited company’s business to one or more of its shareholders; the business is then operated by either a sole trader or a partnership. As hon. Members may recall from earlier debates, the independent Office of Tax Simplification, also known as the OTS, published its final reports into small business tax in February 2012. The reports identified some business owners who would prefer to operate their limited company in unincorporated form. For some individuals, that would be less burdensome, as they would not have to submit annual returns to Companies House or to operate a pay-as-you-earn system for directors’ pay. There would also be no need to distinguish between cash held by the company and personally, or to worry about directors’ overdrawn loan accounts.

Many of the businesses referenced in the reports were incorporated in the mid-2000s under the 0% corporation tax rate introduced by the previous Government, which I think Members on both sides of the Committee, on reflection, would probably agree was not the cleverest policy in incentivising businesses that are more naturally happy to be unincorporated to become incorporated. Despite the benefits of operating as a sole trader or partnership, many of those businesses have been discouraged from disincorporation by a number of tax charges.

Clauses 57 to 60 provide a relief for shareholders who choose to continue their business in an unincorporated form. The changes made by the clauses will allow business owners to transfer qualifying assets from a company to one or more of its shareholders, with no immediate corporation tax charge on the company. Relief will be available to about 610,000 companies with total qualifying assets of goodwill and interest in land not exceeding £100,000, covering about 40% of UK companies and the majority of very small businesses that may want to disincorporate.

The hon. Member for Newcastle upon Tyne North asked how many are likely to make use of it, as opposed to likely to be eligible for it. OTS research suggests that 14% of small companies would like to operate as unincorporated businesses. I think 14% of 610,000 companies is around 90,000; we shall see. Disincorporation relief will remove a key barrier to disincorporation and therefore allow a business greater flexibility to choose the most appropriate legal structure in which to operate. Unincorporated businesses may also be eligible to use the new cash basis for unincorporated businesses, simplifying their tax calculations still further.

HMRC and BIS are working together to provide simple guidance on their websites. That should be available from around September. I was asked about the impact on HMRC resources. HMRC is working through the details, but I understand that it expects minimal impact on its resources.

I was also asked about the impact on those who sign up but then have assets valued above £100,000. Those businesses will not receive disincorporation relief, but they are able to agree the valuation with HMRC beforehand, so it may be possible to avoid working extensively through the process. It will be available to them to agree the valuation before a claim is made, and HMRC allows businesses to check post-transaction valuations using form CG 34, in case anyone wanted to know.

Disincorporation relief will reduce the tax charges on eligible businesses that wish to disincorporate. It will encourage individuals to select a legal form based on their business needs, rather than continue with the form in which they found themselves a few years ago that is not to their liking, and it is a useful addition to our tax regime.

Clause 61 - Attribution of gains to members of non-resident companies

Catherine McKinnell (Labour, Newcastle upon Tyne North)

This clause, like clauses 26 and 30, provides us with an example of the Government’s approach to making legislation EU-compliant that even the leading bodies for the tax professionals have stated is not up to the mark. I will not repeat the damning assessment by the Chartered Institute of Taxation, which I have quoted previously, but I would be grateful if hon. Members bore it in mind when I put the points it raised to the Minister and ask him a few questions on the measure.

Of course we support the anti-avoidance aims of section 13, but concern has been expressed that the clause and the Government’s attempts to make the legislation EU-compliant will not achieve their stated aim. As I mentioned, the Chartered Institute of Taxation said in February:

“We have our doubts that the proposed exclusion for ‘economically significant activities’ is wide enough. We doubt whether the revised draft legislation would be EU compliant.”

It then set out in some detail its reasons for believing that. Although it welcomed the raising of the minimum participation threshold from 10% to 25%, the CIOT said:

“Because the proposed 25% threshold not only looks at holdings directly owned by the individual but also holdings owned by a wide range of other connected persons, it is far from clear that the increase in the threshold will by itself will prevent the freedom to move capital being also potentially engaged.”

Those concerns about clause 61 remain, as they do regarding clause 26, and the CIOT has publicly queried the basis on which the Government rejected its analysis of the provisions.

It is not only the CIOT that is concerned; the Institute of Chartered Accountants in England and Wales is concerned as well. In its response to the draft legislation, it said:

“It is our view that the amendments made to the draft legislation…do not increase the likelihood of the UK law being EU compliant; if anything the position is worse than previously.”

Clearly, it is imperative that the Government get this right. If they do not, we will be discussing it again in Finance Bill 2014 and, I am sure, many people hope we will be discussing the matter again in Finance Bill 2015. Although I appreciate that the Minister is not in a position to discuss at length the legal advice he may have received, can he at least explain the grounds upon which he has discounted the views of the Chartered Institute of Taxation and the Institute of Chartered Accountants?

Although clause 61 modifies section 13 of the Taxation of Chargeable Gains Act 1992 to make it EU-compliant, he will be aware of a number of concerns about section 13 that have not been addressed in the Bill. The Charity Tax Group, which represents more than 400 members, has highlighted three main issues with section 13 that affect charities with investment portfolios. It believes that section 13 is discriminatory because: it allows a charity to invest in a UK company but prohibits investment in, for example, a German company; charities are exempt from taxation on gains, so to be covered by section 13 is perverse, because there is no tax to avoid; and, finally, that it is often impossible to determine whether a charity has exceeded the 25%—previously 10%—limit, because its co-investors in a fund are treated as connected and therefore have to be aware of the collective holding. Given that a charity often does not know who the other investors are, let alone their tax residence status, it may be impossible for the charity to determine whether it falls within the scope of section 13. I understand that the Charity Tax Group has been in discussions with HMRC regarding its section 13 concerns, so I would be grateful if the Minister provided some assurance that these matters are at least under review.

David Gauke (Conservative, South West Hertfordshire)

Clause 61 amends anti-avoidance legislation in section 13 of the Taxation of Chargeable Gains Act 1992. In broad terms, it ensures that a UK-resident person cannot arrange the artificial placement of assets overseas to avoid UK tax on gains. Let me explain a little of the background to the clause.

Section 13 attributes gains arising from the disposal of assets by an overseas closely controlled company to a UK-resident person that has an interest in that company. The UK-resident person would otherwise be taxed on such gains had they disposed of the asset and realised a gain themselves. The measure is intended to apply only where a UK-resident person has a significant interest in the overseas company and only in relation to tax avoidance, with genuine commercial activity excluded from charge.

On 16 February 2011, however, we received a reasoned opinion from the European Commission in which it contends that our existing legislation does not go far enough to ensure that genuine commercial activity is excluded from charge, and is therefore incompatible with EU treaty freedoms. The Commission made several points in support of its analysis. First, it would not be possible for a UK-resident person participating in business with an overseas company to avoid a tax charge by proving that the relevant transaction was bona fide and carried out for genuine commercial reasons and lacked any avoidance purpose. Secondly, UK rules appear to go beyond addressing what UK law refers to as wholly artificial arrangements, because the rules apply to any capital gains realised on the disposal of assets by a non-resident company in which the UK resident has an interest, but they do not explicitly enable the UK resident to remove the potential charge by establishing that the transactions are carried out for genuine commercial reasons and do not constitute artificial arrangements set up for tax-avoidance purposes only. EU law recognises that a restriction on the fundamental freedoms is permissible if it is justified by overriding reasons for public interest in preventing tax avoidance and is appropriate and proportionate to that aim. The changes made by clause 61 are intended to address the concerns raised by the European Commission.

Subsection (2) raises from 10% to 25% the interest that a participator or connected person may have in the overseas company before gains are attributed under the provision. That simplification is helpful and reduces the exposure to a possible breach of treaty freedoms.

Subsection (3) introduces two new exemptions. One is for economically significant activities, the definition of which follows the language of European case law and requires the activities to involve the use of staff, premises and equipment and the addition of economic value commensurate with the size and nature of those activities. The test is broad enough to cover also the making of investments where they are not aimed at avoidance. Secondly, it provides a motive test that enables UK members of a non-resident company to avoid any charge to tax where they can show that the activity was genuinely commercial and that the main purpose of the activity was not the avoidance of tax.

Subsection (4) defines economically significant activities for the purposes of the exemption and clarifies that provision of furnished holiday accommodation is to be interpreted as a legitimate disposal of an asset under section 13(5)(b) of the 1992 Act and therefore excluded from the charge under section 13. The legislation will apply to disposal taking place on or after 6 April 2012.

There was broad agreement among respondents to the consultation that an effort should be made to distinguish carefully between arrangements designed to avoid tax and those carried out for genuine commercial reasons, but views differed on how to achieve that. In particular, the use of the term “active management” as a barometer of genuine economic activity caused concern. Some in the investment and financial services sectors commented that active management would mean different things in different businesses and expressed concern that if the wording were used, it might inadvertently bring businesses within the scope of the charge simply because of their structure, even though they do not carry on economically significant activities.

It was also suggested that the blanket exclusion of “making of investments” from economically significant activities does not sit comfortably with the broad aim of the changes. Investment activity that serves the aims of the treaty should not be excluded from the exemption, because it does not, for example, provide goods or services in the way originally proposed. We have listened to those concerns, and, as a result, we have removed the requirement for active management. We accept that the making of investments can represent economically significant activity.

Let me pick up some of the points raised by the hon. Member for Newcastle upon Tyne North. The first point was whether there should be a specific exemption for charities. We do not believe that would be appropriate. The vast majority of charities are genuine but, regrettably, the generosity of reliefs and exemptions afforded to charities can make them targets for those who wish to avoid UK tax. It is important that we protect the positive connotations of the word “charity” in the public mind. An exemption for charities could encourage determined tax avoiders to set up sham charities to avoid UK tax. In practice, it will not be difficult for charities to comply with section 13.

Let me turn now to the broad question whether the changes make the legislation compliant and to the concerns raised by the likes of the CIOT and the ICAEW. As I said when we discussed clause 26, EU law in this area is not well defined and is still developing. The European Commission may therefore wish to test the application of EU law in this area through proceedings in the European Court of Justice. The Government believe the changes we have made ensure that the legislation complies with our European obligations.

On whether the burden of proof that tax avoidance was not the motivation should fall on the taxpayer, section 13 of the 1992 Act requires the participant to self-assess whether tax is due. HMRC can of course open an inquiry where it thinks tax should have been paid; in doing so, it will need to show why it thinks tax should have been paid. If an inquiry is opened, the participant will need to be able to satisfy HMRC that avoidance was not the main motivation, and any disputes may be taken to the independent tax tribunal.

Our priority must be to maintain the effectiveness of this anti-avoidance provision as a defence against abusive cross-border arrangements and to do so without impeding genuine commercial activity. The amendments we have made—increasing the participation threshold, introducing an exemption for economically significant activities and introducing a motive test—achieve that aim. I therefore hope the clause can stand part of the Bill.

Clause 67 - Cars with low carbon dioxide emissions

Ian Mearns (Labour, Gateshead)

I beg to move amendment 50, in clause 67, page 35, line 37, leave out subsection (2).

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss the following:

Amendment 54, in clause 67, page 36, line 15, at end add—

‘(9) The Chancellor of the Exchequer shall review the overall impact of the Government’s overall budgetary and policy decisions on support for the low emitting vehicles industry, and the sales of these vehicles, and place a copy of this review in the Library of the House of Commons within six months of Royal Assent.’.

Clause stand part.

Ian Mearns (Labour, Gateshead)

It is a pleasure to serve under your chairmanship once again, Mr Crausby. The amendment would remove subsection (2), which makes a change so that cars provided for leasing no longer qualify for the first-year allowance. It does that by repealing the override contained in section 46(5) of the Capital Allowances Act 2001. As the fourth report of the Transport Committee highlighted last September,

“The Government is committed to reducing carbon emissions to 80% below 1990 levels by 2050. Emissions from domestic transport comprise approximately a quarter of the UK’s total carbon dioxide emissions, with emissions from cars accounting for over half of this figure. The Government must therefore make significant efforts to decarbonise road transport if it is to meet its carbon reduction commitments under the Climate Change Act 2008. There are a number of approaches to decarbonising road transport. Plug-in vehicle technology is one of the more market-ready of these approaches.”

The north-east economy has an interest in electric vehicles, because Nissan is producing the model known as the Leaf, which has added a significant number of new jobs to the production lines. The Government hope to encourage consumer demand for plug-in vehicles by providing financial incentives for consumers to buy the cars and by providing funding for publicly available vehicle charging infrastructure. Consumer demand has increased since the Government introduced the plug-in car grant, but we are hearing mixed messages from the Department for Transport about whether demand is lower than expected or progressing according to forecasts.

Initial public investment in charging infrastructure was designed to provide reassurance to potential plug-in vehicle owners that they would be able to charge their cars in public spaces if necessary. The DFT hopes that this will stimulate demand for plug-in vehicles. However, the national charge point registry was far from comprehensive and lacked even the location of the majority of charge points installed using public funds. That is of concern.

We are also concerned about the cost to the public or to companies buying fleets of electric vehicles, which represents a significant initial capital outlay. Undoubtedly there are savings down the line from fuel use, but we are concerned that getting rid of the first-year allowance for fleet vehicles will have a significant impact on the uptake of electric vehicles in the overall market.

The clause extends the 100% first-year allowance for expenditure incurred on cars with no CO2 emissions, which was due to expire on 31 March this year, and extends it for an additional two years to 31 March 2015. It also reduces the emissions thresholds that determine the rates of capital allowances available on cars. Given that subsection (2) will exclude UK firms leasing or renting such cars from claiming the previous 100% first-year allowance, there is concern in the industry about the potential market impact, given the relatively high initial capital outlay for the vehicles.

No doubt, as the technology advances the unit cost of the vehicles will reduce, but we are not at that stage yet. It is the comparative outlay for the vehicle against an internal combustion engine vehicle counterpart in the existing market that worries us. There is serious concern, given the critical role that UK leasing and rental firms have played in supporting the purchase take-up and use of low-emitting cars.

Consumer and business confidence is important in helping this new and potentially highly successful industry to grow in the UK. The industry is of particular significance to the north-east, because of the role of Nissan and its supply chain. I have said before in Committee that Nissan on its own employs about 6,500 people, but there are probably about another 25,000 jobs in the supply chain in the wider north-east region and the north of England.

John Pugh (Liberal Democrat, Southport)

The hon. Gentleman is making an interesting speech, but there is a complication when we talk of decarbonisation, because electricity is produced from carbon sources. People who argue for clean diesel would say that the overall impact of that would be less than that of an electric car, so the Government face a dilemma if they do not know the exact source of the electricity.

Ian Mearns (Labour, Gateshead)

The hon. Gentleman makes an interesting point. I think there are some fairly advanced-stage tests on the electric vehicles produced by Nissan showing that the carbon emissions from the electricity they use are significantly less than those produced over the same mileage by petrol or diesel engines. I think a test was done on the fleet of vehicles used by Darlington council. I apologise if I get the figures wrong, but I think it was something like 9,000 miles for less than £100 of electricity. That is significant in terms of potential CO2

Clause 67 could have a detrimental impact on the UK’s low-carbon electric vehicle industry. Subsection (2) will exclude UK firms leasing or renting such cars from claiming the previously available 100% first-year allowance. That is a serious concern given the critical role that UK leasing and rental firms have played in supporting the purchase take-up and use of low-emitting electric vehicles.

We have been repeatedly told that the Government see themselves as the greenest ever, but what have we seen? Three years on, we see a Government that in 2012 presided over an increasing level of CO2

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As my hon. Friend has outlined, clause 67 extends the 100% first-year allowance for expenditure incurred on low-CO2

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 67 - Cars with low carbon dioxide emissions

David Crausby (Labour, Bolton North East)

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

Amendment 54, in clause 67, page 36, line 15, at end add—

‘(9) The Chancellor of the Exchequer shall review the overall impact of the Government’s overall budgetary and policy decisions on support for the low emitting vehicles industry, and the sales of these vehicles, and place a copy of this review in the Library of the House of Commons within six months of Royal Assent.’.

Clause stand part.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It is good to be here once more after the lunch break, Mr Crausby. We are discussing clause 67, and the extension of the first-year allowance for expenditure on cars with low carbon dioxide emissions. I was in the process of welcoming the extension; I was also commenting on how my hon. Friend the Member for Gateshead had carefully outlined the detrimental impact that the clause could have on the UK’s low-carbon and electric vehicle industry, given that subsection (2) will exclude UK firms leasing or renting such cars from claiming the previously available 100% first-year allowance. That is clearly an extremely serious cause for concern, given the critical role that UK leasing and rental firms have played in supporting the purchase, take-up and use of low-emission cars. I look forward to the Minister’s response, given the impact that subsection (2) could have on the industry.

My hon. Friend the Member for Gateshead also made clear the importance of consumer and business confidence in helping this new and potentially hugely successful industry to grow in the UK. That industry has particular relevance and significance to a region such as the north-east, given the role that Nissan and its supply chain play in the local economy. Amendment 54 calls on the Government to take stock and consider the impact of their various announcements and policy decisions relating to the industry since 2010; they should have a look in the round to see what effect those announcements and decisions have had.

Before testing the Committee’s opinion on the amendment, we will discuss whether the clause as a whole should stand part of the Bill. I therefore want to take the Committee back briefly to the heady days of 2010, and the Prime Minister’s visit to the Department of Energy and Climate Change with the then Secretary of State for that Department—I apologise to the hon. Member for Eastleigh for bringing it up. The Prime Minister used that visit to claim that this Government would be the greenest Government ever. Three years on, and we have a Government who in 2012 presided over an increase in the level of CO2 and greenhouse gas emissions, who have been blocking the CO2 decarbonisation target for 2030 for the UK’s power sector in the Energy Bill and who have mired themselves in a plethora of misdemeanours. We have had the feed-in tariffs debacle and the forests cock-up; then there is the fact that they are the first Government since the 1970s not to have a Government-funded energy efficiency scheme; there is also their continued to-ing and fro-ing over renewables policies, and indeed the dreadful decision this month to plough on with the badger cull. We also have a relatively new Energy Minister, the right hon. Member for Sevenoaks (Michael Fallon), who as recently as last year was questioning whether climate change targets were even necessary.

What, then, of the Government’s support for the low-carbon vehicle industry? The coalition has a programme in place, led by the Department for Transport, to increase the uptake of low-carbon emission vehicles, which is obviously welcome. However, the Opposition are genuinely concerned that, as with so many other areas of Government policy, the continued chopping and changing and giving out mixed messages across Whitehall has caused unnecessary uncertainty for a relatively new industry, in which certainty and predictability will be absolutely key to success. There is particular uncertainty for consumers who are thinking of purchasing a low-carbon emission vehicle: one example was the short-sighted and damaging decision to cut back on the planned national network of charging points for electric vehicles back in 2011. The decision to exclude UK firms that are leasing or renting low-emission cars from the 100% first-year allowance is worrying: it is another bad signal that the Government are sending out.

The Opposition are not alone in expressing this concern. Last September the Transport Committee report, “Plug-in vehicles, plugged in policy?”, was highly critical of the Government’s approach. It concluded:

“The Government must avoid creating instability in the plug-in vehicle market through a lack of consistency between departments in their approaches to financial incentives for plug-in vehicles and adopt a more coordinated approach to these incentives across Whitehall.”

It also said:

“We regret the Treasury’s decision to change the financial incentives framework for low carbon vehicles without prior consultation. Such unexpected changes to these incentives risk creating instability in the market for plug-in vehicles.”

On the financial incentives, the report stated:

“The March 2012 Budget announced a number of changes to the financial incentive programme for low carbon vehicles. General Motors commented on these changes as follows:

We were disappointed with the recent announcements in the 2012 budget relating to low carbon vehicles. In order for low carbon vehicles to be successful they require a taxation system that encourages their uptake. Increasing the company tax rate for low emission vehicles after 2015 and preventing leased business cars being eligible for first year capital allowances will not help this. This has made purchasing a plug-in vehicle less attractive to the corporate consumer with little overall benefit to the Exchequer.

This disappointment was echoed by other industry representatives. The Society of Motor Manufacturers and Traders stated ‘such unexpected announcements cause instability in the fleet market and provide mixed messages on market support.’ Toyota was ‘surprised’ by the announcement and said it ‘may cause instability in the fleet market and send a mixed message’”.

Critically, in relation to amendment 54 and the need for stability to support this industry, the report also stated:

“In addition to the potential financial impact of this change, industry witnesses told us that the perception that financial incentives were changeable was also problematic. Ian Allen, from Vauxhall, told us that such instability was particularly problematic in a ‘fragile, fledgling market.’ Graham Smith, from Toyota, concurred that ‘there are plenty of reasons why consumers might be cautious about a new technology. Therefore, anything that changes and destabilises the regime within which that purchase takes place… will affect particularly professional buyers.’ He argued that this change should be reconsidered and that ‘there is an opportunity to reverse what is a fairly negative signal towards the auto sector in the UK were those changes to be reconsidered.’ Toyota argued that ‘continuation and stability of such measures is important to avoid retreating too early from the incentive frameworks’ as this ‘could negatively impact the consumer’. It stated ‘we encourage a coordinated cross-departmental approach by Government on policies relating to low carbon’”.

Any right-thinking person would regard a co-ordinated cross-departmental approach as common sense, but achieving it is apparently beyond this Government. The tax information and impact note states that the provisions included in clause 67 are

“expected to encourage higher levels of investment in the most environmentally-friendly business cars.”

That is something that we all want to encourage. The assessment of the impact of the measures in clause 67 shows significant gains to the Exchequer with an additional £25 million in receipts expected in 2013-14, £115 million in 2014-15, £185 million in 2015-16 and £250 million in 2016-17. So what is the real motive behind the changes that the Government are introducing? Are they genuinely trying to support the take-up and use of low-emission cars or have they found a target to help reduce the deficit, which at the current rate of reduction will take 1,000 years?

For all the reasons outlined, the Opposition believe that the Government should take a step back and look at the overall impact of their policies and spending decisions on the low-carbon vehicle industry and the sales of these vehicles. It is vital that the Government have a co-ordinated, long-term, strategic approach to this area. That is not only our belief but that of many of those in the industry who are equally concerned about the impact of the Government’s policy approach.

Fiona O'Donnell (Labour, East Lothian)

Even though I sense that my hon. Friend is coming to the end of her contribution, would she like to encourage Lib Dem members of the Committee in particular to support the amendment? During the vote on decarbonisation, some members of their party were willing to stand up for the green credentials that the Government claim.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank my hon. Friend for that insightful intervention. Amendment 54 is very reasonable. We ask the Government to take a strategic view of the impact of all their

“budgetary and policy decisions on support for the low emitting vehicles industry, and the sales of these vehicles,”

and to place a report before the House of Commons. Not only have the Government claimed to be the greenest Government ever but they have claimed to have high aspirations to be transparent. Supporting the amendment would put their approach to both those challenges in the public domain.

John Pugh (Liberal Democrat, Southport)

I am sympathetic to the hon. Lady’s point, but not to the amendments that have been tabled. I think that the Government would happily agree with her suggestion that we need a long-term strategic approach to such matters. I have tabled an amendment to a later clause a propos liquid petroleum gas. We are in agreement that the Government need to be strategic, take a long-term view and provide certainty for industry. All that amendment 54 appears to do, however, is to call for an analysis of the impact of taxation. As the hon. Lady said, the Transport Committee has already done that, so the amendment seems anodyne. One would suppose that the Chancellor does that as a matter of course on all fiscal measures. I am not clear how any of the Opposition’s amendments would put in place a long-term strategic approach.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I did not catch the hon. Gentleman’s final point. Obviously, the Select Committee looked at the matter in advance and sent out warnings about some of the potential policy changes. We are now voting on those changes in Committee, but unfortunately the Opposition do not have enough Members to vote them down. To do so would require the Liberal Democrats to put their money where their mouth is on their green credentials and join us in holding the Government to account on their green claims. We are asking the Government, with the immense resources at their disposal—[ Interruption. ]

David Crausby (Labour, Bolton North East)

Order.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you, Mr Crausby. We are asking the Government to carry out a strategic overall review after the event to assess the impact of the changes. We have asked for the report to be produced within six months of Royal Assent. The measure is a perfectly reasonable one, and I hope that Liberal Democrat Members will join the Opposition in voting for it, to ensure that the Government are going down the right track in supporting a vital and still fledgling industry.

Sajid Javid (Conservative, Bromsgrove)

I apologise to the hon. Member for Gateshead for not being here at the start of debate on the clause. I have listened carefully to his remarks, which he made very well, and I will touch on them shortly.

Clause 67 makes several changes to the capital allowances system for business cars. Those changes will ensure that the capital allowances system continues to provide a targeted, robust and fiscally sustainable incentive for businesses to purchase the most environmentally friendly vehicles. The changes will also support the UK’s progress towards European Union emissions targets for 2015 and 2020, and they will lay the foundations for a strong, sustainable low-carbon economy.

Allow me briefly to give some background. The rate of capital allowances available for expenditure on a business car is currently determined by the car’s carbon dioxide emissions. That is designed to provide a financial incentive for businesses to purchase cleaner cars over more polluting ones and support the Government’s objective of reducing carbon dioxide emissions in the UK. Capital allowances for business cars were first linked to carbon dioxide emissions in 2008. Since then, there have been significant improvements in engine efficiencies and a significant reduction in vehicle emissions.

We need to take steps to ensure that the capital allowances system continues to reward investment in the cleanest cars and to support the Government’s wider objectives for the UK environment. The changes made by clause 67, which were announced at Budget 2012, are designed to achieve just that.

The first change is to extend the 100% first-year allowance for expenditure on the lowest carbon dioxide emitting vehicles for two years, until 31 March 2015, which will continue to reduce the cost of investment in the cleanest vehicles by increasing the value of capital allowances relief to a business. To ensure that the first-year allowance remains effectively targeted, the qualifying emissions threshold will be updated in line with the EU emissions target for 2020. Expenditure on leased cars will also be excluded from the first-year allowance from April 2013 to ensure that the first-year allowance delivers value for money in terms of the environmental benefit it brings to the UK.

The second change made by the clause is to reduce the carbon dioxide emissions threshold at which expenditure on a car qualifies for the main capital allowances rate. The new emissions threshold, which takes effect from April 2013, will provide a more appropriately targeted incentive, which aligns with the EU emissions target for 2050.

The third and final change is to reduce the carbon dioxide emissions threshold above which the lease rental restriction applies, in line with the changes to the main capital allowances rate threshold. The lease rental restriction reduces how much of a business’s rental payments on high carbon dioxide emitting vehicles are deductible for tax purposes. The new threshold, which takes effect from April 2013, is therefore designed to provide a more effectively targeted disincentive for businesses to hire or lease environmentally polluting vehicles.

Amendment 50, tabled by the hon. Member for Gateshead, would allow expenditure on low CO2 emissions cars bought for leasing purposes to continue to be eligible for 100% first-year allowances. I sympathise with the concerns that such an exclusion might reduce the effectiveness of the first-year allowance in supporting low emission vehicle uptake in the UK.

The Government believe, however, that it is necessary to protect the Exchequer from abuse. Without the exclusion, there is nothing to stop an overseas business leasing low-emission vehicles from the UK in order to benefit from the first-year allowance. In that situation, the Exchequer would subsidise the cost of providing the first-year allowance, despite no environmental or economic benefit accruing to the United Kingdom. That is not an effective use of taxpayers’ money. All other mobile leased assets are excluded from first-year allowances to protect against that risk of overseas leasing.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I appreciate the arguments that the Minister is putting, but is there a risk that he is using a sledgehammer to crack a nut? He says that there is no economic benefit to the UK, but that seems to disregard the knock-on impact on production in the UK and on the supply chain resulting from destabilising confidence in the market itself.

Sajid Javid (Conservative, Bromsgrove)

I was just coming to that issue, which we looked at carefully. We explored alternative anti-avoidance proposals as part of the discussions with industry—was there a way we could try to achieve that without the benefit going overseas? We were unable, however, to identify a simple, EU-compliant proposal to provide an effective safeguard against that potential abuse. Nevertheless, the Government will keep the matter under review and see whether it is an area we can look at again in future.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Do I detect from the Minister’s comments that the Government will support our amendment today, to keep the situation under review and produce a report in due course that will be placed in the House of Commons Library?

Sajid Javid (Conservative, Bromsgrove)

I think the hon. Lady’s detection system is faulty. I am coming to amendment 54.

Amendment 54 asks the Chancellor to review the impact of the Government’s budgetary and policy decisions on support for the low-emitting vehicles industry and the sale of such vehicles. I shall reaffirm the Government’s strategy in this area and explain why a review of its success is unlikely to be informative at this stage. The Government aim to position the UK at the global forefront of the development, manufacture and use of ultra-low emitting vehicles. They are looking to support the UK’s progress towards European Union emissions targets and lay the foundations for a strong and sustainable low-carbon economy.

To help achieve that aim, the Government have made £400 million available through the Office for Low Emission Vehicles, which has been used to support initiatives that break down the barriers to growth in the market, such as awareness, cost and a lack of infrastructure. Alongside that, they have introduced strong packages to support our aim through the tax system, including: a commitment to reduced rates of company car tax on ultra-low emission vehicles, at least until 2019-20; an extension of the 100% first-year allowance for low emission vehicles until 2018; and the introduction of a new 10% above-the-line credit for R and D, which will support innovation in the automotive sector.

The measures respond to views put forward by industry and provide a clear signal of long-term Government support in this area. Given that the market is still at the early stages of development and that certain policies have only recently come into effect, it is not possible to review their impact accurately within six months of Royal Assent. At this stage, full and systemic tax return data will not be available to HMRC. We have set out an initial assessment of the clause’s economic impact, including the Office for Budget Responsibility’s certified costing, in the tax information and impact note published in December 2012.

If I heard the hon. Lady correctly, in outlining the Government’s estimate of the financial impact of the clause, she may have inadvertently used the older numbers put out when the tax information and impact note was published in December 2012, rather than the latest revised figures, published at Budget 2013. If she would like me to, I can ensure that she has the numbers published at Budget 2013, which are different and I think in aggregate lower over the five-year time frame. I would be happy to provide her with the latest numbers.

We will keep the measure and wider Government support for low-emission vehicles under review and assess the economic and environmental arguments for further targeted support. The changes made by the clause are necessary. They will encourage investment in cleaner cars, support the UK’s progress towards EU emissions targets and ensure that the capital allowances system for business cars remains robust and fiscally sustainable. I ask the hon. Gentleman to withdraw his amendment, and that hon. Members allow the clause to stand part of the Bill.

Ian Mearns (Labour, Gateshead)

I have listened carefully to the Minister and I can almost detect a small feeling of reassurance within myself that the Government will keep an eye on what is being done. I would like my hon. Friend to press amendment 54, which would tighten things up, to a Division, but with the Committee’s permission, I beg to ask leave to withdraw the amendment.

Clause 68 - Gas refuelling stations: extension of time limit for capital allowance

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause extends the 100% first-year allowance for expenditure incurred on gas refuelling equipment that was due to end on 31 March 2013. It has now been extended to 31 March 2015. I note from the tax information and impact note that the policy objective of the measure is

“to support the development and installation of refuelling infrastructure for motor vehicles powered by natural gas, biogas and hydrogen as part of the process of promoting the wider uptake of such vehicles. The relief also complements the 100 per cent”

first-year allowance

“for cars with low carbon dioxide…emissions that is being extended to 31 March 2015.”

It is estimated that the extension will have a negligible impact on the Exchequer. The latest information suggests that there were only 220 gas refuelled vehicles in 2010, and the number seems to have declined from 540 in 2007.

The tax information and impact note continues:

“It is expected that the majority of the businesses who will benefit from the decision to continue the relief, which provides a modest cash flow boost, are concentrated in the transport sector, either haulage or passenger transport.”

The tax information and impact note includes the latest number of gas refuelled vehicles in use, but will the Minister clarify how many gas refuelling stations throughout the UK will benefit from the measure? That information would help the Committee.

Sajid Javid (Conservative, Bromsgrove)

The clause extends the existing 100% first-year allowance for capital expenditure on gas refuelling equipment for an additional two years to 31 March 2015. The Government are committed to supporting the UK’s progress towards European Union emissions targets and laying the foundation for a strong and sustainable low-carbon economy. As part of that commitment, we aim to place the UK at the global forefront of the design, development and uptake of low carbon emitting vehicles.

We have made £400 million available to the Office for Low Emission Vehicles to help to achieve that aim. However, alongside that, we want to maintain a strong package of support through the tax system. We have discussed 100% first-year allowances in some cases, and in this clause we are discussing the 100% first-year allowance for gas refuelling equipment that was first introduced in 2002 and forms part of the tax package. It encourages the development and installation of fuelling infrastructure for alternatively fuelled vehicles, reducing one of the key barriers to growth in that market.

The incentive was due to expire in April 2013, alongside the 100% first-year allowance for low emission vehicles. Clause 68 takes action to address that by extending the 100% first-year allowance for capital expenditure on gas refuelling equipment. The relief will be extended for two years to 31 March 2015. That aligns with the 100% first-year allowance for low emission vehicles, which is also extended by two years in the Bill. The extension of the relief recognises that the UK market for natural gas, biogas and hydrogen-powered vehicles is still in its infancy.

In the Budget 2013 the Government decided to go further. We announced that the 100% first-year allowance for expenditure on gas refuelling infrastructure would be extended for an additional three years to 31 March 2018. That is a clear signal of the Government’s intention to provide long-term support in the area as part of their wide objectives for the UK environment.

The hon. Lady asked about the number of vehicles in question. I do not have those numbers with me and do not want to take an educated guess. I will supply her with the number in writing.

To conclude, the clause extends the existing 100% first-year allowance for gas refuelling infrastructure by two years. It maintains the incentive for the development and uptake of alternatively fuelled vehicles.

Clause 69 - First-year allowance to be available for ships and railway assets

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 69 would remove the current general exclusion from first-year allowances of expenditure incurred on railway assets and ships. There are a number of general exclusions from first-year allowances where expenditure is incurred on ships and railway assets, as they previously received beneficial treatment elsewhere in the capital allowances code; that beneficial treatment has recently ceased.

I understand that clause 69 would remove the anomaly to ensure that first-year allowances are available for expenditure on railway assets and ships. It ensures that FYAs are available for expenditure on energy-efficient and environmentally beneficial plant and machinery and function more generally as green incentive measures for the railway and shipping industries. That is to put in context the question I have for the Minister.

The measure is obviously welcome where it helps to provide a level playing field for investment in the railway and shipping industries. We particularly welcome the additional incentives that it will provide for the industries to invest in energy-efficient and environmentally beneficial plant and machinery. Will the Minister clarify how many companies the measure could benefit and give an indication of the additional levels of investment the Government anticipate as a result of the measure?

Sajid Javid (Conservative, Bromsgrove)

The clause makes changes to the Capital Allowances Act 2001 to give investors in ships and railway assets access to first-year allowances. The changes ensure that investors in those assets are treated consistently with others investing in similar assets in different industry sectors.

For those investing in certain types of plant and machinery, 100% first-year allowances are available. That provides businesses with a cash-flow advantage over normal writing-down allowances and acts as an incentive to invest in particular types of plant and machinery.

However, not all expenditure incurred by business is eligible for first-year allowances. There are a number of general exclusions, including those for expenditure incurred on both ships and railway assets. The exclusions for those two asset classes exist because both ships and railway assets have received beneficial treatment elsewhere in the capital allowances code. That beneficial treatment was, however, time-limited and has recently expired.

Therefore, to ensure consistency of treatment across the capital allowances code, the clause removes the general exclusions from first-year allowances of expenditure incurred on ships and railway assets. Providing access to energy-saving and environmentally beneficial first-year allowances will also encourage investment in green technologies in the ship and railways industries

The hon. Lady asked whether the measure will have a positive impact on investment decisions. Although we would not expect any extra trains or ships to be bought as a result of the measure, access to first-year allowances offers an incentive for UK infrastructure projects to procure the most environmentally friendly plant and machinery where such a choice exists. To the extent that businesses respond to this signal—indications from the representations that we received from the rail industry show a positive response, although the latest energy or water-efficient equipment may be more expensive—there could be some slight increase in investment.

In conclusion, the clause supports the Government’s objective of promoting fairness in the tax system and the removal of the exclusions. It allows investors in ships or railway assets access to first-year allowances and removes an anomaly in the legislation that denied a relief available to other investors in similar assets in different industry sectors. It also provides access to energy-saving and environmentally beneficial first-year allowances that will encourage investment in green technologies in the ship and railways industries. For that reason, the clause should stand part of the Bill.

Clause 70 - Hire cars for disabled people

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 70 provides for one of a number of cross-cutting measures that are being implemented through the Bill following the introduction of the personal independence payment and armed forces independence payment from 1 April 2013 to replace disability living allowance. The measures incorporate the inclusion of a reference to PIP in one of the definitions of “disabled child” for the purposes of employer-supported child care, which we have already debated when we considered clause 12; provide a vehicle excise duty exemption for recipients of enhanced mobility PIP and a 50% discount for recipients of standard mobility PIP, which we will come to in clause 188; amend the list of specified benefits for the purposes of exemption from insurance premium tax, which we will deal with in clause 199; amend, for the purposes of vulnerable beneficiary trusts, the definition of “disabled” to include those in receipt of PIP or AFIP, which we will come to in clause 213; and amend the definition of hire cars for disabled persons in the Capital Allowances Act 2001 to include reference to recipients of PIP and AFIP. That sets out the context of the clause.

As Committee members know, the short-life asset regime enables firms to write off the cost of capital assets over their life in the business against the firm’s taxable income, thereby enabling tax allowances to be brought into line with the actual depreciation of plant or machinery when an item is scrapped or sold within eight years of its acquisition. It ensures that the total allowances match the actual net cost to the business, providing an advantage where the allowances would otherwise be less than the net cost.

Cars leased to disabled people fall within the SLA regime. However, the definition of a disabled person for capital allowance purposes is based on receipt of a certain type of benefit, including the disability living allowance. Thus, given the recent changes to disability allowances, which have not been uncontroversial, with the personal independence payment and the new armed forces independence payment being phased in from April 2013, the definition of '”disabled person” for the purposes of capital allowances clearly also needs to change. So clause 70 extends the definition with effect from 1 April 2013. However, reference to DLA in the definition will remain until DLA has been completely replaced.

The tax information impact note states that the change is being made

“so that new and continuing recipients of these benefits and claimants of the tax reliefs and supports are both eligible for the same reliefs and supports”.

Strictly speaking, that is true. However, the tax information impact note also points out that

“it is expected that as part of the overall changes to the welfare system, approximately 500,000 disabled individuals will no longer receive either DLA or PIP”.

We regularly hear concerns that the changes are being made to suit the Government’s rapid deficit reduction agenda and the need for cuts, rather than to ensure that the welfare system meets the needs of disabled people. Of the 500,000 people expected to be taken off disability living allowance, does the Minister know how many currently hire cars that are therefore available for capital allowances under the SLA regime? Does he think that those who currently hire cars but are losing their disability allowance will therefore no longer be able to hire them?

Have the Government assessed the impact on the businesses that hire cars to such people? It will surely be more tax-efficient for such firms simply to stop hiring cars to people in such circumstances. I would be interested to hear the Government’s thinking on how that will work in practice, or whether they have assumed that businesses will simply be expected to bear the additional cost. I would be grateful if the Minister addressed those points.

Sajid Javid (Conservative, Bromsgrove)

Clause 70 is a purely technical amendment. It ensures that the beneficial capital allowances treatment for cars hired to disabled persons continues for recipients of both personal independence payments and armed forces independence payments.

The Government are reforming the welfare system by introducing universal credit. As part of those reforms, the Department for Work and Pensions is introducing personal independence payments, and the Ministry of Defence is introducing armed forces independence payments. Both have effect from 1 April 2013. To ensure that those who are intended to benefit from certain reliefs remain eligible, some technical amendments to the tax code need to be made.

One such amendment is required to the Capital Allowances Act 2001 in respect of cars hired to disabled persons. The capital allowances short-life asset regime brings tax allowances into line with the actual depreciation of plant or machinery when an item is scrapped or sold within eight years of its acquisition. That accelerates the timing of tax relief when compared with assets that cannot be treated as short-life assets. Usually, cars are excluded from the regime, but cars hired to certain disabled people are eligible for short-life asset treatment, as it has the benefit of making the cars cheaper for disabled persons to hire.

The current definition of a disabled person for capital allowances purposes is based on the receipt of certain types of allowance, including disability living allowance. The changes made by the clause will extend the definition of a disabled person for capital allowances purposes. It will include reference to recipients of both personal independence payments and armed forces independence payments with effect from 1 April 2013.

The hon. Lady asked how many cars are hired by disabled people, and how many people will be affected by the measures. More than 600,000 vehicles are leased to people in receipt of certain disability benefits. The impact on individuals who no longer receive disability benefits is unclear and may depend on a number of wider non-tax factors.

The hon. Lady referred specifically to the equalities impact assessment published alongside the announcement of the measure. I know that her question was more detailed. She asked how many of the approximately 500,000 disabled individuals who will no longer receive DLA or PIP will be affected by the measure. I do not have that number, but I will try to find out whether that number exists and we can get further information for her. If I can, I will provide it to her.

Ian Mearns (Labour, Gateshead)

Perhaps the Minister should ask the Minister with responsibility for disabled people to look into her crystal ball. Back in December, she was able to tell us exactly how many people would get a reduced award or no award at all under the new PIP payments. She said that 560,000 people would be reassessed, 160,000 people would receive a reduced award, 170,000 people would receive no award and 230,000 would receive the same amount or more. The hon. Lady will be able to tell the hon. Gentleman the answer to the question.

Sajid Javid (Conservative, Bromsgrove)

The hon. Gentleman makes clear something that Government Members already know: we have an excellent Minister for disabled people. The Treasury works closely with her Department to come up with estimates and figures, and to determine, the potential impact of measures. We shall continue to do so, especially with that Minister.

James Duddridge (Conservative, Rochford and Southend East)

I apologise that I was not present at the start of the debate. A car has been obtained through the Motability scheme for a disabled member of my family, and the process is slightly more complex than has been portrayed. There are several categories of claimants, such as children who will not be receiving PIP, but who have higher rate disability living allowance due to mobility, and I think that they will be affected. Will the Minister write to the Committee to confirm the impact, if any, of the measure on the Motability scheme, which is invaluable to our constituents?

Sajid Javid (Conservative, Bromsgrove)

My hon. Friend clearly speaks from personal and constituency experience. I will certainly furnish the Committee with that information.

Brooks Newmark (Conservative, Braintree)

May I throw in my two cents-worth? Is it not right that the personal independent payment scheme is not simply an attempt to take away money from the deserving, but a more granular benefit that provides some people with more money and some people with less? Is it not the case that some of the most deserving people who will benefit from the broadening of the measure will be seriously injured service and ex-service personnel? Will those service personnel who were not captured before under the scheme now be able to benefit, or is this simply a matter of transferring people from one definition to another?

Sajid Javid (Conservative, Bromsgrove)

There might be individuals who were not captured before, but who will be captured under the changes. My hon. Friend makes a wider point about the Government’s focus on benefits, particularly regarding the most vulnerable, to ensure that the most needy receive the most benefits, which is something with which we all agree.

Fiona O'Donnell (Labour, East Lothian)

Has the Minister had any discussions with the Ministry of Defence about how to make veterans aware of the possible advantages for them?

Sajid Javid (Conservative, Bromsgrove)

I have not personally had such a discussion with the Ministry of Defence, but I know that Treasury and MOD officials have been working closely on the matter. There is a programme that is centred on ensuring that members of the armed forces are aware of all the benefits to which they are entitled, such as those that we are discussing. Given that the hon. Lady has drawn attention to such an important issue, I shall ensure that it is considered with the seriousness that it deserves.

Rory Stewart (Conservative, Penrith and The Border)

May I reassure the Minister that an enormous amount of information seems to come out of the Ministry of Defence, the Army, the voluntary sector, the third sector in general and, indeed, councils on the support provided to soldiers? Anecdotally at least, there seems to be a co-ordinated response at the moment. I am sure there is not much more to be done, other than perhaps to bring more of the third sector providers for disability into the conversation.

Sajid Javid (Conservative, Bromsgrove)

I thank my hon. and gallant Friend for his intervention. He speaks with great personal experience of our armed forces, so I am reassured by his comments. He raises an important point about the involvement of the third sector in helping people with disabilities.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I might be wrong, but I sense that the Minister is about to conclude his remarks. However, he has not yet addressed my question about the impact of the measure not only on those who will be reclassified under the new scheme and will not qualify for disability vehicle hire, but on leasing companies? Have the Government considered that issue? Obviously, the change will have a significant impact on individuals, but the Finance Bill must be laser-focused on economic impacts, so the Government should have given some consideration to the measure’s economic impact on companies that hire Motability vehicles to disabled individuals.

Sajid Javid (Conservative, Bromsgrove)

The hon. Lady is right to sense that I am trying to reach a conclusion, but she is also right to make that important point. When the Government looked at the change, our focus was on the people—disabled people in particular—on whom it will impact. I do not have much information to hand about the potential impact on leasing companies. She is right that some may face a change in demand, which might be detrimental to them. That is an important point, but it is not the driver of the Government’s policy. Foremost in our minds is what many hon. Members have referred to in the debate: we must ensure that benefits are focused on the people who are most affected.

If there are no more interventions, I shall now get to my conclusion. The changes will ensure that recipients of the new personal independence payment and the armed forces independence payment will continue to receive the same beneficial treatment under the capital allowances code as under the existing welfare regime.

Clause 71

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss that schedule 25 be the Twenty-fifth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Community investment tax relief was introduced in 2002 under the previous Government to encourage investment in disadvantaged communities. In practice, individuals and companies that invest in accredited community development finance institutions by way of equity or loan are able to claim income tax relief or corporation tax relief of 5% of the amount invested over five years, as long as the investment remains. There are detailed rules about when the investment may be withdrawn.

My understanding is that clause 71 will relax the current onward lending roles of community development finance institutions. At present, the onward lending limit requires them to re-invest at least 25% of the fund by the first anniversary of the accreditation date, 50% by the second anniversary and 75% by the third. With effect from April 2013, the annual dates for calculating whether the prescribed level of onward level has been obtained will be altered from the anniversary of the community development finance institution’s accreditation date. That is obviously a welcome move, as it enables more time for community development finance institutions to meet the required onward lending limits.

My understanding is that state aid approval for the scheme expired in October 2012 and that in order to continue with the relief, the Government have had to amend it to meet state aid requirements. What assessment has been made of the additional investment that is expected to be made from CDFIs as a result of the changes? The tax information and impact note states that the new limit on corporate investors will affect only a small number of companies, as around 120 companies have made an investment under the scheme, with fewer than 10 affected by the cap. How many CDFIs have those 10 companies invested in? How much have they invested to date? The number of companies alone does not give a full sense of the amount of investment that we are talking about.

What more can the Government do to persuade corporate investors to participate in the CDFI scheme, given that there have been only 120 investors out of a potential 3,100 since 2002? In assessing the changes to comply with state aid rules, have the Government also considered how to boost the scheme?

David Gauke (Conservative, South West Hertfordshire)

Clause 71 and schedule 25 will make changes to the community investment tax relief. The changes will provide greater flexibility for claimants of the reliefs and limit the relief for corporate investors in the scheme to ensure that the scheme is compatible with the de minimis limits for state aid. The relief plays an important role in bringing investment into businesses in disadvantaged areas, and has done for more than 10 years now.

Let me briefly provide hon. Members with some background to the clause and schedule. The tax relief for investment is currently restricted to a relief equivalent to 5% of the amount invested, which is allowed over a period of five years to give a total relief of 25%. There is no provision to allow unused relief to be claimed in any other period. The scheme was an approved state aid, but the approval expired in October 2012.

Following discussions with the European Commission, it was agreed that the scheme could be brought within the de minimis limit of €200,000 in any three-year period. The scheme remains a state aid, but not a notifiable one, as long as the limits are adhered to. It will affect only corporate investors; state aid rules do not apply here to individual investors.

The changes made by schedule 25 will allow an investor to carry forward and use in later years any unused relief within the overall five-year period. That will provide flexibility for investors to ensure that they obtain the maximum relief available. Individual investors might not be greatly affected, but corporate investors in difficult economic circumstances will welcome the opportunity created.

Further changes will restrict the overall amount of tax relief for corporate investors to the de minimis limit previously stated. Although that appears to be a substantial restriction, it is not anticipated that it will greatly affect corporate investors, who mainly invest by way of loans. To calculate the relief given, corporate investors will compare their interest return and tax relief obtained with the commercial rate to which they would have lent to community development finance institutions. HMRC has issued draft guidance to explain the calculation and will issue full guidance pending the successful passage of the Bill. Fewer than 10 corporate investors are potentially affected by the change.

I was asked how many CDFIs the 10 companies have invested in, but I cannot answer that question because HMRC does not track what individual investments the companies make. The question is fair, but the hon. Lady will understand why it is not possible to answer it. It is not expected that the changes will significantly alter the level of investment, and they are likely to have an impact on only a small number of companies.

I was also asked what more could be done to encourage investors to use this relief. It is right to say that it has not been as well used as was the intention when it was introduced in 2002. We think that the changes that we are making will help to make the scheme more appealing. It is well established, so I am not sure that a lack of awareness is a problem affecting the take-up of community investment tax relief, which has been in place for 11 years. None the less, the measures represent a constructive change to the current regime, and I welcome the hon. Lady’s support for them.

Clause 72 - Lease premium relief

David Crausby (Labour, Bolton North East)

With this we will discuss that schedule 26 be the Twenty-sixth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 72 and schedule 26 limit lease premium relief available to a trader or intermediate landlord where leases are of more than 50 years’ duration. The measure will take effect if the lease is granted on or after 1 April 2013 for companies, or 6 April 2013 for individuals or partnerships. The change follows a recommendation from the Office of Tax Simplification that the lease premium relief regime was an area that could benefit from simplification. The aim is to simplify the regime so that relief will no longer be available to a trader or an intermediate landlord who pays a lease premium on a lease that is deemed to be short because of the operation of rule 1. I will not go into the technicalities, as I am sure the Minister will explain those to the Committee.

The Chartered Institute of Taxation in its response to the informal consultation on the proposal pointed out that the documents relating to the rationale behind the change are not easy to locate. It said:

“There is no link to the text of the consultation on the HM Treasury or HM Revenue and Customs website.”

However, it continued:

“The justification for such a change is that, in HMRC’s experience, it is generally only used—where the landlord is not within the charge—to tax the time involved in applying the provision for both HMRC and tax agents and apparent disputes that can arise between landlord and tenant in the application of those rules.”

It went on to state:

“We do not believe the reasons for the proposed change have been fully explained and appear to indicate an element of discrimination between tax-exempt and taxable landlords for which we see no obvious rationale. To set the proposed change in context it would be helpful to have further information on all leases with tax exempt landlords (number and value), and the number and value of leases which take advantage of the relief to reduce the effective duration of the lease for tax. It would also be of assistance to know what proportion of the latter are considered abusive and why such abuse cannot be tackled with existing legislation.”

The tax information and impact note clearly indicates that the measure is one of simplification, with operational savings expected to HMRC and the Valuation Office Agency. It says:

“Initial HMRC operational impact is estimated to be less than £2 million resource savings. Includes a saving of 25 per cent of Valuation Office Agency specialist technical team resource.”

Will the Minister clarify whether, as the CIOT suggested, concerns have been expressed about potential abuse of the scheme? If so, what action has been taken to address those concerns? Does the Minister have the information and the figures that the CIOT requested in its consultation response? The tax information and impact note suggests that the number of businesses affected is unknown. It is difficult to know how effective a simplifying measure will be when no information is available about how many businesses it might affect.

David Gauke (Conservative, South West Hertfordshire)

The clause and schedule remove lease premium relief where a long lease is treated as a short lease for tax purposes. The measure will simplify the complex area of lease premiums; it will help businesses reduce the need for costly and long negotiations; and it will protect tax revenue.

In 2011, the Office of Tax Simplification recommended lease premium relief as an area that might benefit from simplification, but it acknowledged that the relief aspect of the regime could not be reviewed in isolation and that a review of the entire regime would be required. The preferred solution of the OTS involves following the commercial accounts for tax purposes. However, given the current possible changes in accounting for leases, such a review must be one for the future.

The Government announced at Budget 2012 that they would consult informally on the potential implications of amending a complex element of lease premium relief rules concerning the tax treatment of long leases as shorter leases, which is one of the areas that the OTS review highlighted. Analysis shows that that part of the regime is used only where the landlord is tax-exempt, so the premium received is not taxed. Relief is consequently obtained, often after detailed valuation and legal considerations, on a payment for which there is no matching taxable receipt.

Current law taxes a lease premium payment, made on granting a lease of fewer than 50 years, on the recipient landlord and relieves it on the tenant where the tenant is a trader or a subsidiary landlord. The premium would otherwise be a capital payment for tax purposes. Where the payment relates to a lease of more than 50 years, the premium is not charged to tax as income. However, the premium for a lease of more than 50 years is also treated as a taxable receipt in certain circumstances where the lease is deemed to be shorter than 50 years, and that is where the complexity lies. As a result of the clause and schedule, relief will no longer be available to a trader or intermediate landlord who pays a lease premium or a lease that is deemed to be short only because of specific tax legislation. The measure will be effective for leases that are granted from the beginning of the tax or financial year.

The hon. Member for Newcastle upon Tyne North asked how many individuals companies would be affected by the changes. We estimate that the number is not significant, and the consultation responses do not suggest otherwise. The consultation respondees did not supply any figures, although they were asked that question. She asked what proportion of cases were abusive and were not covered by the existing rules. The existing rules do not cover cases where the recipient is tax exempt. There are no checks and balances if the recipient is exempt; there is no figure to match the relief against.

As for CIOT’s comment that the consultation paper was not easy to locate, officials sent a copy to the CIOT. On the issue of discrimination between tax-exempt and taxable landlords, the tenant is not affected by the status of the landlord. If the landlord is tax exempt, he is not charged on the sum received; if he is not tax exempt, there is no change for him. I hope that that provides some clarification.

The clause and schedule address a complex area of lease premiums. Although the time is not right for a wholesale review of the regime, as requested by the OTS, an interim change on a specific complexity is appropriate. The clause and schedule will simplify a complex area of tax, will help business reduce the need for costly and long negotiations, and will protect tax revenues.

Clause 73 - Manufactured payments: stock lending arrangements

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause has been introduced to close a tax avoidance activity involving manufactured payments in the area of stock lending arrangements. Most manufactured payments are made and received by banks and other financial traders and, as the tax information and impact note explains, are payments representative of dividends and interest on shares and securities, whether paid under contracts or other arrangements for their transfer. The Committee may be aware that manufactured payments are routinely paid in the financial markets under stock lending or repo transactions. A manufactured payment is a compensation payment made by the temporary holder of the shares or securities to the original owner to reflect the fact that the original owner does not receive the real dividend or interest. Manufactured payments would fall to be taxed as ordinary trading expenses and receipts.

The field is an extremely complex one. An avoidance scheme has been identified in the area of stock lending arrangements that attempts to prevent a tax charge arising when a manufactured payment made to represent the dividend or interest arising on the securities that have been lent would be taxed as trading income. The avoidance scheme attempts to avoid that charge by arranging for some manufactured payments to be made, but also for part of the payment representing the dividend to be received in a non-taxable form. That explains the background to the clause, which amends the relevant sections of the Income Tax Act 2007 and the Corporation Tax Act 2010 to provide that when any benefit is received representing the dividend, it will give rise to a charge on the stock lender as though an actual manufactured payment had been received.

The tax information and impact note suggests that the measure will have a negligible impact on the Exchequer. Will the Minister clarify what impact the use of the avoidance scheme has had on the Exchequer to date, and why so little future impact is expected? The impact note also outlines that 100 businesses enter into or administer stock loans and repos of shares and securities where there is a payment and/or receipt of a manufactured dividend. How many of the 100 firms have been making use of the avoidance scheme and over what period? In the light of that loophole being identified, what action, if any, is Her Majesty’s Revenue and Customs taking against them?

David Gauke (Conservative, South West Hertfordshire)

Clause 73 makes changes to block tax-avoidance schemes involving stock lending arrangements, as the hon. Lady points out. Those schemes claim to exploit a weakness in the current legislation; blocking them will lead to greater fairness by ensuring that everyone involved in stock lending pays their fair share of tax.

I will briefly set out some background to the clause. Manufactured payments arise as a normal part of the financial system, where a company lends shares or other securities to another company. If a dividend is paid on the shares when the shares are out on loan, the borrower of the shares is generally required to pay a manufactured payment representing the dividend to the stock lender. That payment will be taxed where it arises as part of a financial trade.

There are anti-avoidance provisions in the tax legislation to prevent companies and individuals avoiding this tax charge by paying the manufactured payments to someone other than the lender, then receiving a payment from that other person in a non-taxable form, for example, a loan write-off within a group of companies.

The schemes blocked by the clause involve paying just part of the manufactured payment in a non-taxable form rather than all of it. It is claimed that that circumvents the legislation. While we do not accept that those schemes achieve the tax-avoidance effect that they claim, the clause will put it beyond doubt that the manufactured payment is taxable however it is made.

The changes made by clause 73 will ensure that the company that receives manufactured payments is taxed on them in whatever form they are paid. For example, if a company benefits by having an outstanding loan written off, that will lead to a tax charge, as they have received manufactured payment. Similar changes are being made to the equivalent income tax provisions.

The hon. Member for Newcastle upon Tyne North asked how many companies were involved in that avoidance and how much tax was lost. HMRC is aware of one company using the scheme. It was first identified in 2011, so it has been used over the past couple of years. Tax loss from the scheme was £50 million a year. It is important to take action promptly as the scheme could have been used by any company involved in financial trading, so there is a risk of that becoming more widely used. Hence, clause 73 would close down an avoidance scheme and bring certainty to companies and individuals involved in manufactured payments for genuine reasons.

Clause 74 - Manufactured payments: general

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss that schedule 27 be the Twenty-seventh schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause and schedule are related to the previous clause and are introduced to simplify the tax treatment of manufactured payment dividends for corporation tax purposes and all manufactured payments for income tax purposes. I think the Minister has already responded to the concerns that I have noted about the clause, in particular the 100 firms mentioned as being involved in the area, and how many are understood to have been pursuing avoidance schemes. Will the Minister clarify in relation to this particular measure whether the same response applies: that there has been one company since 2011 avoiding tax of around £50 million a year?

Will the Minister also comment on how widespread the abuse of complex existing manufactured payments rules has been? How widespread has the abuse of the general rule been? What has been the impact on the Exchequer overall of the use of those rules, given that the tax information and impact note suggests that it will help to close down avoidance opportunities that have arisen due to the very complex nature of the existing rules?

David Gauke (Conservative, South West Hertfordshire)

The clause and the schedule make changes to the tax rules for manufactured payments to simplify the legislation and reduce opportunities for tax avoidance. The existing rules are extremely complex and have been the subject of numerous avoidance schemes. It might be helpful again if I describe the background to the changes.

Manufactured payments are made to and by holders of shares that are lent out under stock lending or repo arrangements. Such arrangements are vital features of the UK and global financial system. On 15 September 2011, the Government announced changes with immediate effect to block the latest in a series of avoidance schemes involving manufactured overseas dividends. At the same time, it was announced that we would consult on proposals to make wider changes to the tax rules on manufactured payments as part of the programme of reviewing high risk areas of the tax system.

The consultation document, “Proposed changes to tax rules on manufactured payments”, was issued on 27 March 2012, with a closing date for comments of 22 June 2012. Following the responses to the consultation, the Government are legislating all the changes proposed in the consultation document, with a commencement date of 1 January 2014. The measure simplifies the legislation by abolishing the rules that currently require deduction of tax from payments, and gives tax credits to the recipient of payments. An exception will be made only where foreign tax has been suffered to ensure that UK companies will not lose out on double taxation relief that is genuinely due.

The changes made by the clause and the schedule will affect three areas of the tax system. First, corporation tax: there will be no special rules for taxing and relieving manufactured dividends paid and received by financial traders. For non-traders, receipts of manufactured dividends will be treated as the real dividends of which they are representative, and payments of manufactured dividends will not be deductible. No changes are being made to the rules for payments representative of interest.

Secondly, income tax: the recipient of a manufactured payment will be treated as receiving the real dividend or interest of which the payment is representative. A payer of a manufactured payment will obtain a deduction for the payment only if it is made for the purposes of a trade. Thirdly, on the deduction of tax from payments of manufactured overseas dividends, as a result of the abolition of the rules requiring deduction of tax from MODs, the recipient will lose any corresponding entitlement to double tax relief. This will not affect any entitlement arising where foreign tax has actually been deducted from the MOD. Only companies and others that enter into stock loans and repos of shares and securities and that pay and receive manufactured payments will be affected. We estimate that there are around 100 businesses that do that.

The Government launched a consultation in March last year aimed at simplifying the tax rules on MODs and manufactured payments generally, with a view to making avoidance more difficult in future. The responses were overwhelmingly supportive of our proposals. The main issue raised was that double taxation relief should be given for any foreign tax deducted from manufactured payments, and that was incorporated into draft legislation published for consultation in December last year. We have also made one minor change to ensure that life insurance companies will, where appropriate, be able to continue to claim relief for manufactured dividends paid.

The hon. Member for Newcastle upon Tyne North asked about the number companies involved and the scale of abuse. The clause is a general measure aimed at simplification rather than at avoidance alone, but it will protect against loss of tax. To give a sense of the significant sums that may be involved, one scheme that was legislated against in the Finance Act 2011 involved about £490 million of revenue per year. The clause and schedule simplify the rules for manufactured payments by abolishing deduction of tax from payments and tax credits on receipts, which reduces the opportunities for avoidance.

Clause 75 - Relationship between rules prohibiting and allowing deductions

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 75 introduces targeted anti-avoidance rules to the provisions that govern the relationship between rules prohibiting and allowing deductions, after the Government became aware of a marketed avoidance scheme that sought to generate artificial loss release from a property business with the intention that users of the scheme could offset the losses against their corporation tax-liable profits. The Government’s move to close down the scheme is, of course, welcome, but I would be grateful if the Minister would clarify the following issues. How did the Government become aware of the scheme? Were they notified via Labour’s disclosure of tax avoidance schemes provisions, which have protected a significant amount of revenue for the Exchequer? The total amount of revenue protected by DOTAS had reached £12.5 billion by March 2012. It would be useful to have an update on that figure and on the number of schemes that have been identified through the DOTAS provisions.

When did HMRC become aware of the scheme? It would be useful for the Committee to get a sense of how long it took the Government to act once they became aware of the scheme and the avoidance activity. Do the Government know to how many organisations the scheme was being marketed, and whether it was targeted at any particular geographical regions? The Treasury press release states that closing down the scheme

“will protect the Exchequer from potential losses of tens of millions of pounds”

and the tax information and impact note indicates that doing so

“is expected to increase receipts by approximately £10 million per annum”,

which is a significant sum. How many individuals or businesses have used the scheme to date, and over what time period? How much is thought to have been lost to the Exchequer as a result of the loophole? What attempts did HMRC make to challenge the use of the scheme before the changes took effect on 21 December 2012? The Treasury press release of the same date states:

“The Government will introduce a new General Anti-Abuse Rule (GAAR) next year. The GAAR will give additional, general protection for the Exchequer against abusive arrangements of this kind.”

Will the Minister clarify whether, despite the fact that—we assume—the GAAR will come into existence on the passing of the Bill, if the GAAR had been in place when this avoidance scheme was identified, it would have dealt with that scheme and that that would therefore do away with the need to legislate for the targeted anti-avoidance rule? If he could answer those points, that would be beneficial to the Committee.

David Gauke (Conservative, South West Hertfordshire)

The clause makes changes to ensure that the rules allowing and disallowing deductions for trade and property businesses cannot be exploited for avoidance purposes. Towards the end of last year, the Government became aware of avoidance activity intended to exploit the rules that allow statutory deductions for certain types of business expenditure. That avoidance relied on the creation of artificial costs that companies would have deducted from their profits chargeable to tax. An announcement was made on 21 December 2012 that legislation would be introduced with immediate effect to counter that avoidance involving statutory deductions.

The changes made by the clause will introduce targeted anti-avoidance rules for both income tax and corporation tax purposes. They will deny a statutory deduction, which would otherwise be allowed, where the deduction arises from avoidance arrangements. The measure will affect only persons seeking to use tax avoidance schemes or arrangements; it will not impact on other tax payers. That action will protect substantial amounts of tax.

To turn to the questions raised by the hon. Member for Newcastle upon Tyne North, perhaps I may begin by addressing the general anti-abuse rule, given that this is a targeted anti-avoidance rule, and whether that will be dealt with by the GAAR. It is worth saying that the GAAR is targeting all abusive tax-avoidance schemes, but we have also made it clear that we will continue to take firm action against all forms of tax avoidance to protect the Exchequer from attempts to bend the rules of the tax system to try to gain tax advantages that Parliament never intended. In other words, there is still a place for targeted anti-avoidance measures even if it may well be that the general anti-abuse rule will apply.

At this point, it is probably not helpful to speculate on whether particular arrangements will fall inside or outside the general anti-abuse rule. There are a number of elements to the general anti-abuse rule and, indeed, guidance produced by an independent body and so on, so I do not want to second guess what will be produced in this area. It is worth underlining, however, that in future there will be a place both for GAARs and for TAARs within our tax system.

On how the Government became aware of the scheme, the hon. Lady is correct to say that it was a notification under the disclosure of tax-avoidance schemes rules. She knows that my view is that DOTAS is a useful tool for the Government, but we need to reform it and improve it; that is something that the Government are engaged in.

The hon. Lady asked how many companies, and of what type, this scheme was marketed to, how many used it and over what period of time. The information on the number and type of companies is not available to us. The data on how many used the scheme will become known to HMRC with a fair degree of confidence only when returns are made, so that information may come to light subsequently.

On the hon. Lady’s question about tax lost, we do not believe that the scheme worked as such, and HMRC will challenge the use of the scheme pre-dating 21 December, so we do not believe there has been any tax lost. The introduction of the targeted anti-avoidance rule will prevent repeated use of the scheme and an escalation through similar schemes. It is good to remove any uncertainty, but that does not mean that HMRC believes that the scheme works as such.

In conclusion, the Government are committed to tackling tax avoidance, and this measure clearly demonstrates that we will not hesitate to take rapid action to close down avoidance schemes as we become aware of them. I hope that the clause will stand part of the Bill.

Clause 76 - Close companies

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss the following: Government amendments 65 to 69.

That schedule 28 be the Twenty-eighth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 76 introduces schedule 28, which closes three loopholes exploiting perceived weaknesses in the legislation taxing loans made by close companies to individuals, known as participators, who have an interest or shares in the company. Tax avoidance is both unfair and unacceptable to the vast majority of taxpayers, who pay the right amount of tax. The schedule amends part 10 of the Corporation Tax Act 2010, to close down that avoidance with immediate effect from the Budget announcement on 20 March.

A close company is one owned and run by only a small number of participators, who have an interest or shares in the company. In certain circumstances, close companies are subject to a tax charge on loans they make to their participators. That charge is appropriate because a loan is a way to extract value from a company, albeit under the terms of a loan. Some people have attempted to circumvent legislation to deliberately avoid the tax charge. In many cases, the same people also seek to use the arrangements to avoid or minimise income tax and national insurance contributions. The vast majority of close companies and their participators are compliant and pay any tax due on value extracted from companies by the participators. Those who seek to exploit the rules gain an advantage, and that position is simply unfair.

The clause amends the legislation in three ways: first, the tax charge will apply to all loans made to a partnership or trust in which at least one partner, trustee or beneficiary is a participator in the close company making the loan. Unlike before, that is regardless of whether there is a corporate partner or trustee in the structure. Secondly, the clause introduces a targeted, purposive anti-avoidance rule to catch payments that are not strictly loans, which currently fall outside the rules for loans. The final change requires repayments of loans to remain with the company for at least 30 days, which will reduce scope for manipulation. Further, if there are arrangements in place to withdraw funds at the time the repayment is made, relief from the tax will be denied even if the new payment is outside the 30-day period.

The Government propose amendments 65 to 69 and schedule 28 to make final changes to the rule. Concerns were raised that the Bill did not focus closely enough on the policy objective, and that the new rules may unintentionally catch genuine commercial practice, rather than solely avoidance behaviour. The amendments will target the Bill more narrowly, and remove ambiguity by more clearly defining which loans and repayments should be taken into account in applying the first test on how such repayments should be treated. The second test will focus on arrangements that have been made to replace the original loan with a new loan when the repayment was made.

Amending the rules in such a way will aid both business and HMRC with their application. It will relieve small businesses, more closely focusing the new rules on the anti-avoidance function, and reduce any uncertainty and operational difficulties for both businesses and HMRC. We introduced the legislation in March immediately to counter avoidance of the tax charge. The changes will ensure that it works effectively in practice.

Most small businesses that incorporate are close companies. Although the tax charge on loans applies to them, if relevant, the vast majority will be completely unaffected by the closure of the loopholes. In many cases, the rules are being exploited by affluent individuals using avoidance arrangements to reduce their tax bills. The loophole closures are designed to minimise any undue burden on compliant businesses.

HMRC is pursuing an increasing number of those avoidance cases; some avoiders are seeking alternative ways of reducing their tax bills as loopholes are closed down elsewhere. The changes are just one element of the significant crackdown on avoidance by the Government to ensure that companies and individuals pay their fair share of tax. They complement what we are doing around avoidance using partnerships and intermediaries, will yield £270 million over the scorecard period, and further protect revenue; that is important protection for the Exchequer.

Although the rule changes go a long way towards countering avoidance of the tax charge on loans to participators, there is scope to strengthen the regime. Therefore, alongside the announcement, the Government have said that they will consult on options for broader reform of the regime with the aim of creating a fairer and simpler system that will provide the opportunity for businesses, representative bodies and other stakeholders to present their views.

Attempts to exploit perceived weaknesses in the legislation relating to the taxation of loans made by close companies to their participators can give rise to an unlevel playing field between compliant and non-compliant taxpayers. Schedule 28 counters such avoidance, and results in companies and individuals paying the right amount of tax. I commend the clause to the Committee.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the Minister for outlining the purpose of the clause and the Government’s amendments.

The tax information impact note suggests that the changes will result in additional receipts for the Exchequer of £65 million in 2014-15, £75 million in 2015-16, £70 million in 2016-17 and £60 million in 2017-18. Such additional receipts are of course absolutely welcome. However, I would like the Minister to clarify some of the key facts behind the schemes established to avoid the tax charge under section 455 of the Corporation Tax Act 2010. At what point did the Government become aware of the existence of such schemes, and how did they become aware of them? Were the schemes being marketed? To date, how many close companies have sought to use the loopholes? Over what time period, and at what cost to the Exchequer—if that can be assessed—has the avoidance occurred? What attempts has HMRC made to challenge the use of such schemes before the changes took effect on 20 March 2013?

I would also be grateful if the Minister addressed several technical concerns about the Government’s proposed changes. While welcoming attempts to counter avoidance of tax under section 455, the Chartered Institute of Taxation states that there are some situations where it considers that

“the changes will operate unfairly and have unintended consequences”.

In the CIOT’s words, those unintended consequences include

“the fact that the revised section 455(1)(c) CTA 2010 will mean that any loan from a close company to a partnership where there is a participator in the company who is also a partner in the partnership will result in section 455 tax. This seems to be regardless of whether the money lent is then taken for personal use of the partner/participator (which is the sort of abuse that needs to be tackled) or used for the business purpose of the partnership (which may be for valid commercial purposes). In particular loans to limited liability partnerships (LLP) are specifically brought within the scope of the charge.

There are circumstances where a close company sets up an LLP for sound commercial reasons, perhaps as an alternative to a subsidiary company. The LLP may need funds to start trading. If the close company lends the LLP funds for commercial reasons, it does not seem right to us that there will be a section 455 charge if the individual, who is a participator of the company and also a member of the LLP, is receiving no benefit.”

The Chartered Institute of Taxation is also concerned that the provisions introducing the new charge to counter other arrangements are widely drafted. We should therefore welcome clarification of the scope of the charge. The institute stated:

“Firstly, we would like the Government to confirm that the new charge, being introduced at Chapter 3A Corporation Tax 2010, will not apply to capital transactions (including circumstances where a close company reduces its capital under section 641 CA 2006). Capital transactions have their own rules and anti-avoidance provisions, which are generally well understood, and they are not part of the mischief that Chapter 3A is targeting.

Secondly, both examples provided in the Finance Bill explanatory notes use hybrid structures, which seem to be the main aim of this provision. However, there appears to be nothing to prevent the rule virtually applying as a general anti avoidance rule to catch almost any instance where a company is party to a transaction with some tax planning, however benign, that has some indirect effect on a participator or his associate.

This is in effect a general anti avoidance rule for smaller companies and yet has none of the safeguards that surround the new General Anti Abuse Rule. In addition, the rule is already in effect—it took effect from Budget Day.

Unless the Minister is able to give categoric assurances about the scope of these new provisions, we think some amendments are required to the provision to set clear boundaries, e.g. to exclude transactions with a commercial motive as one of the motives. Otherwise it could catch many commercial transactions. Clear guidance will be required to demonstrate the areas that it may cover.”

As for new chapter 3B, which is intended to strengthen the rules that deal with repayment of loans, the institute stated:

“We support the objectives of the provisions in new section 464C(1), which apply where loans are repaid and new loans made within a period of 30 days. However, we have concerns about the drafting, which in some cases appear to lead to some unfortunate unintended results…The purpose of the new rule seems to be to deny relief for a repayment of the loan just before a cut-off date, such as the year-end or nine months after the year-end, where within 30 days that loan is taken out again. We agree with that purpose, but as drafted it also seems to deny relief for repayments of loans during the year if there is a further loan within the year, yet the tax is still payable on the further loan. This seems inequitable as in such cases even if a loan is fully repaid the tax could be payable…We think the reason that the legislation can produce an unintended result is that the drafting seems to be based upon an incorrect assumption of how the existing legislation works. It seems to assume that it was written using the ‘year-end approach’ rather than the ‘separate transaction approach’...Under the pre-Schedule 28 legislation the ‘year-end approach’ and ‘separate transaction approach’ lead to exactly the same amount of s455 tax and s458 repayments…The intention of the clause seems to be to match repayments and loans around the cut-off dates of the period end or the normal due date, so as to prevent any anti-avoidance through repaying a loan just before e.g. the due date, and re-borrowing it just after, but it seems that the clause goes much further than this.”

The institute goes on:

“Under new s464C the two approaches lead to different results, and in the case of the statutory ‘separate transaction’ approach it seems that the answer is often undesirable and unintended. It appears that the effect of the new legislation is that a s455 charge can arise on more than has been lent by the company”.

I accept that resolving those specific worries is the intention of amendments 65 to 69, but I shall be grateful if the Minister can also deal with the other concerns raised by the Chartered Institute of Taxation about the clause to ensure that all such matters are considered, and that we shall not return to Committee to deal with the unintended, unfortunate consequences of the anti-avoidance measure that have been described.

David Gauke (Conservative, South West Hertfordshire)

I thank the hon. Lady for her questions. I will start with when the loopholes were identified. HMRC had been aware of the first two loopholes for some time. It has seen increasing numbers of cases and larger amounts of tax avoided using these structures. In the past three years, just 15 cases involving intermediaries accounted for nearly £7 million tax at stake.

Closing the loopholes is partly protective; clamping down on this avoidance immediately stems further loss of revenue. Some, but not all, of this avoidance is disclosable under the disclosure of tax-avoidance schemes regime, so a full scope of the evidence is difficult. However, closures of loopholes elsewhere and toughening economic conditions have meant that HMRC is seeing persistent avoiders looking for alternative ways to get round other loophole closures, and to save money by avoiding tax.

Exploitation of the repayment rules has been around for many years and become common practice. Leakage of tax through that route also needed plugging for the closure of the other loopholes to be effective. Further, just 15 cases over the past three years have accounted for tax at stake of more than £8 million.

As for how many incidences of avoidance these loophole-closing measures are addressing, for the first two loopholes, HMRC estimates that more than 5,000 companies have a relevant structure in place and loans from those companies to relevant partnerships are, on a central estimate, in the low hundreds of millions. On the third loophole, a recent article in Taxation magazine described the practice of repaying loans to prevent the tax from becoming payable followed shortly by a new loan as

“reasonably common practice among smaller private companies”.

Complete figures are not available because the avoidance can be difficult to detect. The nature of the structures means that only some instances were disclosable under DOTAS, as I mentioned earlier. With regard to whether the schemes are marketed, some are, but most are not.

The hon. Lady asked what attempts HMRC had made to challenge the schemes before the measures were introduced. HMRC has applied the statute as far as it can. Some arrangements have fallen outside the specific wording of the legislation and that is partly why there is a need to take further action.

The hon. Lady also referred to the concern raised by the Chartered Institute of Taxation that there is a targeting of LLPs and all partnerships with company partners. The rules regarding loans to partnerships are simply being aligned, so that a loan to any partnership that has a partner who is also a shareholder of the company making the loan will be caught. HMRC has become aware that increasingly structures were being put in place to minimise income tax, but the specific structure chosen was meant to ensure that the tax charge on loans to participators did not arise either.

Regarding the repayment rules in chapter 3B, the amendments that we have included address the queries relating to year-end. That is part of their purpose.

As for whether “benefit conferred” is rather wide in meaning, and the concern that innocent transactions might be caught and the safeguards that exist within the general anti-abuse rule do not apply in those circumstances, the meaning is necessarily wide as this is an anti-avoidance measure. It is aimed at any payment by a close company that ends up in the hands of an individual participator without an appropriate tax charge. Specifically it should catch capital contributions to partnerships and the company’s share of a partnership profit which are left undrawn by the company where participators then draw those funds out of the partnership. It will not catch innocent transactions as it requires there to be an avoidance purpose. “Benefit conferred” does not have the same meaning as for the income tax legislation; it is aimed at any extraction of value from a company by a participator in a form which avoids the tax charge on loans made by close companies to their participators or creates a tax advantage to the participator. I hope that reassures the hon. Lady and the Committee as a whole.

Schedule 28 - Close companies

Clause 77 - Decommissioning relief agreements

David Crausby (Labour, Bolton North East)

With this it will be convenient to discuss the following:

Clauses 78 to 86 stand part.

That schedule 29 be the Twenty-ninth schedule to the Bill.

Clauses 87 to 90 stand part.

That schedule 30 be the Thirtieth schedule to the Bill.

I remind Members that they should raise any points they have about part 2 of the Bill during this debate.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Thank you, Mr Crausby. If only it were always that straightforward to get that kind of acclamation at this point in a long consideration of a Bill. It is sensible and helpful to take these clauses as a group; otherwise, given the technical nature of some of the clauses, we might have been tempted to stand up and repeat different parts of the explanatory notes and so on. It makes much more sense to take them together.

I will refer to the general issues surrounding this part of the Bill, focusing in particular on clauses 77, 78 and 79. Because the other clauses are so technical, I will not go into every dot and comma and will consider them together. Although the Minister will speak for himself, it is worth commenting first on what the Government say they are seeking to do, which is to provide greater certainty around the decommissioning tax relief and to make it easier to transfer licences to try to increase investment.

We should remember that there are some 470 installations, including up to 4,000 active wells, sidetracks, and 10,000 km of pipeline on the UK continental shelf, and in the coming years there will be increasing expenditure on decommissioning. We already know that about 6,000 wells and sidetracks have been plugged and are therefore abandoned, but the peak period of decommissioning would appear to be between 2015 and 2030, so essentially we are planning the regime for that time. Thereafter, there will be a reducing number of facilities and therefore less decommissioning activity.

It was helpful to receive information from the Government on the model decommissioning deed, which I am sure every member of the Committee has printed off and read from start to end, leading to many questions to the Minister. It is fair to say that the measures in this part of the Bill and the model decommissioning relief deed have generally been much more welcomed by the oil industry than previous announcements—not from this particular Minister—about the tax regime for the industry. At the time, people described such announcements as causing a “sharp intake of breath”—that is the polite version; some of the comments thereafter were less polite. To be fair, this announcement has largely been welcomed by the industry.

I was in Aberdeen fairly recently and met representatives of Oil & Gas UK and spoke to several companies in various parts of the supply chain. They were all keen to put across to me the importance of a tax regime that incentivises safe and economical extraction from the remaining brownfield sites. I will return to safety in a moment, but first I will focus on costs and the most efficient way of extracting from such sites. All of the companies, whether the oil companies themselves or ones forming part of the supply chain, stressed the importance of the industry to the overall UK economy. Crucially, they also discussed in some detail the value of the experience and technical knowledge of the UK industry, in particular when looking to the future, when the brownfield sites have been exhausted and decommissioned, and what will happen to the oil sector not only in Aberdeen and north-east Scotland, but right across the UK. They were keen to ensure that sufficient support is given to ongoing training, for example, to encourage people to come into the industry and ensure that the UK remains a centre of excellence, able to provide support, training and expertise to newer oilfields elsewhere—there was particular discussion of exploration opportunities off the coast of Africa.

As I said, the industry generally welcomes the consultation with the Government on the draft decommissioning deeds, which we will have the chance to consider in more detail by order, but the importance that the industry attaches to the stability of the regime for planning and investment cannot be overstated. The industry was clear that that is particularly important at this stage in the process, because the cost per barrel to extract from brownfield sites is so much higher than from new fields. It feels that decommissioning deeds are central to that ability to plan, because it also gives certainty to companies taking over the brownfield sites. The key issue is ensuring that licences can be transferred and that companies know what the regime will be.

Fiona O'Donnell (Labour, East Lothian)

My hon. Friend is making an excellent speech about a sector that is vital to Scotland’s economy. Does she agree that stability must actually mean stability this time? The Government’s record on the oil industry is not unblemished.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend for that point. People have indeed been critical in the past. She also brings me neatly on to the position of the Scottish Government on decommissioning, about which the Minister will perhaps be able to say something, because he was recently in Scotland—I hope he enjoyed his visit and I am sure that he will tell us all about it.

The positions of the Scottish Government and the SNP on decommissioning seem to be rather confused. Back in April 2012, Fergus Ewing, the Scottish Energy Minister, stated that

“in principle, given that the UK has received substantial revenue from these rigs, it seems correct that the UK has a moral and certainly a legal obligation to be responsible for the decommissioning”.

That was stated in relation to any North sea oil and gas rigs that were in operation before Scottish independence. That statement seemed to be contradicted some time later by the First Minister, who, in response to a question about whether a separate Scotland would pay for decommissioning costs, stated:

“That’s against an expected revenue return of £400 billion over the same period of time. So it’s about 5 per cent of the government revenue. So if you’re asking will we take the decommissioning costs, we’ll take 5 per cent cost of a 95 per cent benefit, then the answer is yes.”

Once again—perhaps unsurprisingly—we seem to have contradictory positions within the Scottish Government.

Fiona O'Donnell (Labour, East Lothian)

Will my hon. Friend press the Minister to find out whether there has been any communication with the Treasury on this matter? It will be vital to Scotland’s economic success should it vote yes next year, which I am very confident it will not.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am sure that the Minister heard my hon. Friend’s question. Whether Scotland separates from the UK is pertinent to this debate: it would make no sense at all were a future UK without Scotland to be left with the responsibility of providing tax reliefs for that decommissioning. Other countries would perhaps not provide tax relief for the decommissioning of a nuclear power station outwith their borders. I know that my hon. Friend the Member for East Lothian has an interest in that industry as well. I do not want to dwell on that issue too much.

Fiona O'Donnell (Labour, East Lothian)

Oh, go on!

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend could tempt me, but I suspect that the good progress we have made today would be derailed should we go into the question of the nuclear industry, rather than focusing strictly on what we are here to discuss with regard to decommissioning.

The clause is important because it allows for Parliament to make payments to assist in the decommissioning of oil and gas installations on the UK continental shelf. It also provides some exemptions to the duty imposed by section 18(1) of the Commissioners for Revenue and Customs Act 2005, which I am sure hon. Members will have found as absorbing as the draft decommissioning relief deed. Clause 78 goes on to describe the meaning of “decommissioning expenditure”, which is important as it provides the basis for the implementation of the decommissioning reliefs.

I very much welcome clause 79. If hon. Members look closely, they will see that it makes provision for an annual report. Specifically, it introduces a requirement on HM Treasury to lay before Parliament an annual report on the Government’s liabilities under decommissioning relief agreements; it states that the report must be provided for each financial year and defines the information that the report must contain. It also provides that:

“The report for a financial year must be laid before the House of Commons as soon as is reasonably practicable”

and ensures that the measures have effect

“in relation to financial years ending on or after 31 March 2014.”

The Committee has discussed several times the provision of annual reports, reporting to Parliament and laying information before Parliament in the interests of transparency, so I will take this opportunity to thank the Minister and to congratulate the Government on getting such measures into the Bill without the Opposition having to table an amendment. Had we had to do that, I would hope that Government Members would have supported it to ensure that there was an annual report.

I said that I would not go through each of the very technical clauses at this stage. If, when the Minister is responding, he raises any further issues I may want to ask particular questions. However, I want to come back briefly to the point that I made at the beginning in relation to safety. The Government are keen to ensure that that is part of the regime, and I know that the UK oil and gas industry, and indeed the trade unions, are taking a particular interest as we approach the 25th anniversary of the Piper Alpha disaster. It is worth noting that there is going to be a major event next week—Piper 25—organised by Oil & Gas UK. It will reflect on the lessons learned as a result of the inquiries that followed that disaster. It will review offshore safety and try to refine the industry commitment to safety as a response to the disaster. It will also look at subsequent learning opportunities, if I may describe them as such, given that so many people lost their lives.

Has the Minister had any representations on the issue? Did he have the opportunity when he was in Scotland to meet concerned representatives? If he has not had the opportunity, will he commit to speak to some of his colleagues who are currently working on health and safety? The point that was strongly made to me by the industry sector and by the appropriate trade unions was that, as it becomes more and more difficult to extract from brownfield sites, people are looking at different technologies and perhaps pushing things that bit further than they had to in the past in order to extract every barrel as economically as possible. It is of course vital that health and safety is not compromised in any way.

A particular concern was raised with me. If the Minister has not had the opportunity to speak to colleagues about it, I implore him to do so. Since Lord Cullen reported, people who have been around for as long as I have in the political scene, although not in this Parliament, will recall that a distinct division of the Health and Safety Executive looked after the offshore industry. Serious concerns have been raised about proposals to change that regime to include responsibility for health and safety generally in the offshore sector within a broader energy division within HSE. That has raised concerns because of the nature of the work that is done offshore.

Of course the taxation regime is extremely important to ensure that we are able to continue with the work on brownfield sites, but I am sure the Minister will understand that safety must also be paramount. If he has not had any representations, will he commit to discuss the matter further with his colleagues and perhaps report back to us?

We have had a lot of talk about “skedules” and “schedules”, so I hope I get my pronunciation right. If we ever needed a reminder of the importance of implementing legislation in dangerous industries, we need only to walk out into Upper Waiting Hall to learn about theSenghenydd pit disaster—I am looking at my hon. Friend the Member for Cardiff South and Penarth to make sure I got my pronunciation correct—to see what happened there. Lessons were learned, legislation was put in place but not implemented, and a further disaster occurred. As we approach the 25th anniversary of Piper Alpha, I am sure that everyone wants to see all the lessons learned. We must ensure that we not only learn those lessons but implement a regime that continues to look ahead and proactively ensure safety in the offshore sector. That is what people are looking for.

Sajid Javid (Conservative, Bromsgrove)

First, I thank the hon. Lady for her comments, which I take to be welcoming and broadly supportive of the Government’s initiative in clauses 77 to 90.

Clauses 77 to 90 and schedules 29 and 30 relate to the introduction of decommissioning relief deeds. The legislation will enable the Government to meet their liabilities under decommissioning relief deeds and makes changes to the tax regime to support the introduction of such deeds.

At Budget 2012, the Government announced their intention to introduce a package of measures to secure billions of pounds of additional investment in the UK’s continental shelf, otherwise known as the UKCS. One part of that was the introduction of a new contractual approach to offer long-term certainty on decommissioning tax relief. Companies operating in the UKCS are legally required to decommission the equipment and other assets at the end of a field’s life. The total cost of decommissioning over the lifetime of the basin is currently estimated by the industry to be £35 billion.

Tax legislation currently provides relief on such costs, but uncertainty regarding the future availability of such tax relief is deterring investment and making it difficult for new players to enter the market.

Such uncertainty is limiting investment in the UKCS in three ways. First, it is creating a barrier to the transfer of licence interests. Vendors of such interests currently require purchasers to provide security for decommissioning costs on a pre-tax basis. That increased capital requirement could prevent sales that would have led to additional investment activity in the North sea basin. Secondly, as some of a company’s capital is often tied up as collateral for the full, pre-tax decommissioning costs, the uncertainty limits the capacity for additional investment. Thirdly, uncertainty deters incremental investment. A company may not wish to prolong the life of an asset if it perceives a risk of losing decommissioning tax relief. Providing fiscal certainty will remove that concern and encourage companies to invest to extend the life of such assets.

To provide certainty over decommissioning tax relief and unlock the potential further investment, the Government will enter into agreements known as decommissioning relief deeds with industry. Such deeds provide a mechanism for calculating the amount of tax relief a company can expect to receive when decommissioning assets in the future. If a company receives less relief than the amount provided for by the deed, the Government will make good the shortfall. That approach should enable companies to provide for decommissioning costs on a post-tax rather than a pre-tax basis. It will remove barriers to the transfer of licence interests and increase the capacity for additional investment in the UKCS.

As the hon. Lady rightly pointed out, the industry has warmly welcomed these changes. For example, the CEO of Oil and Gas UK, said that, for the first time ever, the changes would

“give companies the certainty they need over the tax treatment of decommissioning. At no cost to the Government, it will enable more asset sales to take place and free up capital for companies to use for investment, extending the productive life of the UK continental shelf.”

The novel approach is all about providing the fiscal certainty needed to promote and prolong the life of the UKCS. It is worth noting that if no changes are made to the legislative regime for decommissioning tax relief, the contract itself should never be called upon, other than in the unlikely case of a company carrying out decommissioning because of the default of another company.

The changes made by the clauses will support the introduction of decommissioning relief deeds. They will enable the Government to make difference payments under the deed and so give effect to the contracts. They will also require the Treasury to provide an annual report to Parliament—something warmly welcomed by the hon. Lady—containing information in respect of the deeds, to provide accountability to the House and to ensure transparency. The remainder of the changes relate to technical provisions to ensure that the policy can operate as intended.

Taken together, these changes will support the introduction of decommissioning relief deeds, enable companies to provide security for decommissioning costs on a post-tax basis and remove barriers to the transfer of interests in oil licences.

Before I conclude, I would like directly to address some of the hon. Lady’s points. She will know—she talked about this herself—that the certainty provided by the changes will encourage investment in the industry. The industry’s estimate is that that will unlock at least £13 billion of additional investment over the next few years. Clearly, that is hugely welcome from the point of view of economic growth and the jobs it will help generate.

The hon. Lady mentioned the potential costs. As she knows, it is not intended that the Government will pay out on these deeds. When the Treasury looks at costs, it will also look at potential benefits—we will look at the net result. This is an opportune moment to remind the Committee that, as the Government set out in Budget 2013, we expect these contracts to lead to positive Exchequer impacts as a result of the increased investment that will be brought into the UKCS and the extra tax that the Exchequer will earn. That will start with additional revenue of £140 million in 2013-14, rising to £425 million by 2014-15 and reaching £480 million by 2017-18. All Members will welcome that.

The hon. Lady mentioned Scotland. I have had no discussions with the Scottish Government on this issue. That is simply because it is subject to a reserved power, and there is no need for me to have any discussions. Of course, as we progress and produce information for public consumption, we will share that with the Scottish Government. The hon. Lady described the SNP as “confused”, and she is being generous—I would not be so restrained. On my recent visit to Edinburgh, which she mentioned, I actually dealt with another matter for which I have responsibility: the potentially very negative impact on the Scottish financial services industry if the Scottish people chose independence.

On the subject of independence, which came up in the debate, the UK Government are making no plans for the break-up of the UK. They are fully prepared to provide certainty over tax relief to facilitate the transfer of assets, increase the capacity for additional investment on the UK continental shelf and ensure maximum economic production from that basin.

The hon. Lady rightly raised the question of safety. She highlighted the fact that it is the 25th anniversary of the Piper Alpha disaster, in which many good people lost their lives. That was a lesson in terms of the Government’s approach to the industry. Since the disaster, successive Governments have made many changes to reflect safety and health concerns, as the hon. Lady rightly said. She will know, however, that the Treasury is not directly responsible for setting health and safety rules for the North sea, although we work closely with other Departments—particularly the Department of Energy and Climate Change—and with officials at the Health and Safety Commission. I can assure her that we will, of course, always take this issue very seriously. The Treasury will continue to work with Ministers in other Departments and with officials in any way it can to make sure our standards in the North sea remain among the highest in the industry worldwide.

Let me conclude by saying that decommissioning relief deeds will provide certainty over tax relief. That will facilitate the transfer of assets, increase the capacity for additional investment in the UKCS and ensure maximum economic production from the basin. These changes to legislation will support the introduction of that policy.