Finance Bill

Public Bill Committee, 18 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 179 - Rates of tobacco products duty

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss clause 180 stand part.

Chris Leslie (Labour, Nottingham East)

What a pleasure it is, Mr Amess, to be back in this Committee. I have missed it so much that I shall start with a cigarette—metaphorically speaking. I know that Government Members are keen on escalators, and what we are talking about today is the increase in duty by 2% above inflation on cigarettes, cigars, hand-rolled tobacco, other smoking tobacco and chewing tobacco. I do not know whether it is in order to chew tobacco during a Committee, although I sincerely hope that hon. Members would frown on that pretty unsavoury activity. In case anyone is tempted to take it up, let me say that it is bad for them.

In Labour’s last Budget, the then Chancellor announced that tobacco duty would increase by 1% above inflation in 2010 and by 2% above inflation for the following four years. The clause proposed by the Minister maintains that 2% rise, increasing, together with the consequential VAT arrangements, the average price of a packet of 20 cigarettes by 26p, a pack of five small cigars by 9p, a 25g pack of hand-rolled tobacco by 26p and a 25g pack of pipe tobacco by 14p.

As the explanatory note to the clause states, smoking kills half of all long-term users, and is the biggest single cause of inequalities in death rates between the richest and the poorest in the United Kingdom. That issue is very much to the fore in my own constituency; sadly, in Nottingham East, we have high death rates from smoking-related ailments.

Over the years, a link has clearly been made between the price of tobacco products, the level of demand and issues around health. Successive Governments have chosen to maintain high tobacco duty rates to support health objectives. It is right that we continue to keep tobacco rates high for that very reason, especially as we want to discourage young people and children from taking up the habit.

The Minister will be aware of the questions raised by the tobacco industry in recent years about the role of the sub-economy tobacco sector and trade in cheaper and illegal cigarettes. Indeed, the Government introduced legislation in the 2011 Budget to reduce tax differentials, to address the exploitation of the tax structure by those producing cheaper cigarettes and the revenue loss caused by the down-trading from more expensive brands to the cheaper cigarettes.

In a previous Finance Bill debate, my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson) asked the previous Economic Secretary and the Minister’s predecessor, the hon. Member for Norwich North (Miss Smith), whether she believed the changes had been successful. At the time, when the Budget 2012 decisions were taken, she said that the 12 months’ data were not yet available to her. She said:

“I would like to be able to assess the impact of the Budget 2011 measures prudently before committing to further changes in the structure of cigarette duty…we will have to wait for official data to be released, because information is vital in this area.”––[Official Report, Finance Public Bill Committee, 19 June 2012; c. 520.]

That was fair enough; at the time, the hon. Lady was seeking 12 months. However, we now have this further year lapse. Is the current Economic Secretary in a position to give us an update on this change in terms of the differentials? Clearly, cracking down on illegal grey market or black market tobacco products is incredibly important, especially if we are to ensure that the duty framework is effective. That is something that charities such as Action on Smoking and Health and researchers at the university of Bath have been trying to solve.

For clarity’s sake, now that we have had this further year since the new duty structure began, will the Minister tell us when the most recent assessment was made regarding the impact of changes to tobacco duty on the sub-economy tobacco sector and what its finding was? Will he consider undertaking some further work to try to understand the impact of the changes in the duty structure, looking ahead to the next Budget in terms of how best to ensure that the policy is successful?

Many hon. Members have sought to grapple with this issue, and we are all sadly familiar with the amount of evasion of cigarette duty. When people are picking up cigarettes, it is sometimes difficult to tell which are duty-paid packs. Some interesting ideas about how to tackle that problem have been floated in recent years. I am not sure how some could be implemented, but one suggestion was printing a mark that indicated whether duty had been paid on the side of each cigarette, to make that visible to the outside world. That might have a beneficial side effect: the cigarette would look less cool as a product if it had all sorts of writing and marks along its side. I do not know how feasible that idea is, but has the Treasury thought about alternative ways of marking products, including the cigarette itself?

Fiona O'Donnell (Labour, East Lothian)

Does my hon. Friend agree that plain packaging might give an opportunity to highlight whether or not duty has been paid more dramatically on the packet?

Chris Leslie (Labour, Nottingham East)

That is exactly what I am looking for from the Minister. We now have innovations in printing technology and in the ways that many marks and excise duties can be displayed. I absolutely agree that the pack is a feasible option for that; that is why I also wanted the Minister to consider whether the individual cigarette could be marked in some way. I am not sure about the feasibility of that idea, but it would help if he looked into it.

Other ideas floated include a minimum excise tax. Will the Minister consider those issues? We need to step up our efforts now to make it clear not just to those engaged directly in sub-economy sales but to the public at large that it is important that such products are bona fide.

Clause 180 is interesting. It narrows the general exemptions granted to herbal smoking products so that the exemption is granted only to products used exclusively for medical purposes—although I am not quite sure what those would be. There has been an anomaly on herbal smoking products, including herbal cigarettes, herbal rolling mixtures and herbal shisha, which have apparently been exempt from tobacco duty until now.

We support the clause. Although some might view herbal products as less harmful than tobacco products, many in the health sector have long argued against that view. In its response to the Government’s consultation, ASH stated that herbal smoking is no safer than tobacco, and the Royal College of Physicians has supported the change, saying that herbal smoking products are distinctly unhealthy. Now seems the right time to end the anomaly; indeed, there are European directives driving this question forward—I hope Government Members will not be put off by that.

It is important that we take notice of the health issues relating to such products. Will the Minister tell us what consideration has been given to the possibility that some herbal product smokers will switch to tobacco products if the price differentials between the two decrease? What will be the health implications for those smokers? Some people might worry that that could be a by-product of the measures. If both herbal and tobacco products are equally bad, it is not a massive issue, but we do not know what assessment has been made of the relative health impact of herbal smoking products as opposed to conventional tobacco.

Certain retail establishments promote shisha and other such products. What guidance have the Minister and the Treasury provided to retailers and others so that everybody is clear about how the rules will apply under the new arrangements set out in clause 180?

Stephen Williams (Liberal Democrat, Bristol West)

Good morning, Mr Amess. It is a pleasure to follow the hon. Member for Nottingham East. I agree with everything he said and with what he asked. There is a broad cross-party consensus on the need to halt the smoking of tobacco. It is in that cross-party vein that I speak on the clause today, in my role as chair of the all-party group on smoking and health.

APPGs have had some bad publicity recently and we do not need to go into why. However, it is important to put on the record that the vast majority of APPGs—certainly the one I chair—do a very good job in the House of raising awareness of issues. There cannot be a more important aspect of public health than reducing the rate of smoking. As the shadow Minister said, smoking is the biggest contributor to early death.

The clause maintains the tobacco duty escalator. On Thursday last week, we talked about getting rid of the fuel duty and the beer duty escalators, and segued into whisky. I am disappointed that the hon. Member for Islwyn is not here, but I will say, as I was not able to last week, that in that segue on whisky he should have said that the superior whisky of Wales is made in the superior valley of Wales: the Cynon Valley. He can have the pleasure of reading that in Hansard this afternoon or on Thursday.

The clause raises the duty by 26p per pack. That means that most standard brands of cigarettes will cost between £7 and £8, or roughly 40p a cigarette. I want to focus on an area that I thought the shadow Minister described too gently as “the sub-economy”. I would describe as criminal activity the selling of cigarettes that are either counterfeit, faking well-known brands, or are completely fictitious brands—the so-called “illicit whites” as they are known in the trade, particularly in respect of handrolled tobacco. A large amount of handrolled tobacco consumed is bought and sold illegally in this country.

I want to ask the Minister about the resources the Treasury has allocated to HMRC to tackle tobacco smuggling. I was quite disappointed by the Minister’s written answer to me on 5 June, when I had asked about the resources given to advertising the reasons why tobacco smuggling was wrong. I was surprised to learn that in 2011-12 and 2012-13, HMRC spent nothing on advertising about tobacco. I have put similar questions to the Home Office and am awaiting answers.

I asked about those issues because the most recent inquiry and report of the all-party group on smoking and health looked at tobacco smuggling and at good practice from around the country. In the north-east of England, collaboration between the police, HMRC, the UKBA, council trading standards and NHS-funded bodies showed that advertising can play a role in persuading people that it is a bad idea to turn up at a car boot sale or public houses and buy under-the-counter, illegally sourced cigarettes. The people behind such activity are not terribly nice; they tend to be involved in other activities such as fencing stolen goods or smuggling drugs or other illegal products.

Our inquiry found that the most effective advertising in the north-east of England was showing a child smoking, and persuading parents that illegally sold cigarettes would be sold to under-age people. That was the most effective message in persuading people that it was a sinister activity.

Mike Thornton (Liberal Democrat, Eastleigh)

As a quick aside, I congratulate my hon. Friend on his medal and the recognition recently given him by the World Health Organisation on his fight against such a pernicious and addictive drug. [Hon. Members: “Hear, hear.”]

Does my hon. Friend agree that, while historical evidence has shown that sharp increases in tax rates have resulted in a sharp decrease in smoking rates, perhaps the time has come to treat the illegal smuggling of tobacco in the same way and with the same fierceness that we treat illegal drug smuggling in this country?

Stephen Williams (Liberal Democrat, Bristol West)

I thank my hon. Friend for his intervention. A fiver or a legally sourced drink may well go his way later for mentioning the UN medal from the World Health Organisation that was presented to me last week.

Chris Leslie (Labour, Nottingham East)

Why aren’t you wearing it?

Stephen Williams (Liberal Democrat, Bristol West)

It does not come with a ribbon; it comes in a box so, unfortunately, I cannot wear it—[ Interruption. ] I have not brought it with me either.

As for what my hon. Friend said about treating the issue with seriousness, that is what I am talking about. I want to express caution about treating it the same as other narcotics. Tobacco is a legal product. I have no desire to make tobacco an illegal product, but I am worried about those who sell it illegally. I urge the Minister to consider increasing the resources available to either HMRC or other agencies within the Treasury to spend on advertising in such areas because, as we all know, it can have an effect.

As well as the report from the all-party group, members of the Committee are probably aware that the National Audit Office published a report on 6 June on progress in tackling tobacco smuggling. The report stated that HMRC had collected £9.9 billion worth of tobacco duties, making a significant contribution to the funding of public services and bridging the deficit. However, we have lost an estimated £1.9 billion in revenue that has not been collected, and that is the estimated size of the illegal market. It is said that approximately just below 10% of boxed cigarettes are sold on the illicit market, but 38% of hand-rolled tobacco is sold that way and that is where much of the revenue is lost.

The National Audit Office draws attention to the fact that each £1 that HMRC and the Treasury spend on tackling the illegal trade is effective; £69 million was spent in the year under study, and it is thought that that led to a recovery value of £919 million in illegally sourced goods that were intercepted. I am sure that most members of the Committee agree that that is a pretty big return. In the first comprehensive spending review of the coalition Government in 2010, an extra £25 million was allocated for the next few years to source extra intelligence officers, particularly in eastern Europe from where much of the illegally sourced tobacco comes, and that is starting to make a significant impact on the destruction of the activities of criminal gangs.

The coalition Government are undertaking a mini expenditure review for their final year and the first month or so of 2015-16. We know that the Treasury has essentially settled its spending review, so I urge the Minister, within whatever spending envelope the Treasury has settled with itself, to regard the resources that it gives to the HMRC on tobacco smuggling as a value-for-money exercise. The first report under my chairmanship in 2010 showed—and it informed the comprehensive spending review that year—that each £1 spent on such matters is incredibly effective and is likely to lead to a huge increase in the tax revenue going into the Treasury.

I have gone somewhat wider than the narrow parameters of the clause, but this is an important topic. It is an opportunity to raise our legitimate tax base and, more importantly, to lead to a healthier and longer living population, which has both societal and economic benefits.

Ian Mearns (Labour, Gateshead)

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

I concur entirely with what the hon. Member for Bristol West has just said. I want to thank the Treasury officials who penned the explanatory notes on the clause, which are worth relaying and putting into the public record. They state:

“Smoking kills half of all long-term users and is the biggest single cause of inequalities in death rates between the richest and poorest in the UK.”

We need to emphasise that point.

As a former chair of the Gateshead Smokefree Alliance and a colleague of the hon. Member for Bristol West in the all-party group on smoking and health, I think that it is our duty to try to control tobacco as much as we can. It is a massive detriment to public health, the health of the individual and the prospects of prosperity for an awful lot of people.

Every time a football match from Wembley stadium is broadcast on television, or if we have the luck to attend a match there, we should look at the crowd. The crowd at Wembley, when it is full, is about 90,000. That is roughly how many people die young from the impact of smoking every year. Just think about all the individual bums on seats at Wembley stadium; that is how many people are dying prematurely as a result of smoking in this country annually. We forget that at our peril.

There have long been debates in this country about the efficacy of smoking and how much smoking contributes to the public purse. However, I think we all now know that its contribution is far outweighed by its impact on the health service bill of this country and on people’s ability to carry on working into later life, and by the fact that so many people die prematurely.

The hon. Member for Bristol West talked about the north-east of England. We have had significant success through campaigns such as Fresh in the north-east of England. In my constituency, the Smokefree Alliance has been part of a partnership project to reduce overall levels of smoking in the general population. We have been so successful that smoking in the general population in Gateshead has fallen from over 30% to the national average of about 21% or 22% in less than a decade. That is vital work.

Even within a community such as Gateshead, we see significantly different levels of smoking in the general population from neighbourhood to neighbourhood and from electoral ward to electoral ward. It is quite clear that the size of family or household income has a significant bearing on whether an individual is likely to smoke. The prevalence of smoking among the poorest communities is still far too high. Anything we can do, through price and taxation, to try to deter people from smoking has to be seen as a positive.

Behind the whole matter is an organisation called the Tobacco Manufacturers Alliance, which has for decades peddled the myths, first, that smoking is not dangerous, and then that it is not as dangerous as it is cracked up to be. However, we know for a fact—this is on the record—that while executives of large companies involved in the tobacco trade peddle the substances that kill so many people and damage families, they would not dream of taking up the habit themselves. I call it a habit: it is actually a serious addiction. Both the British Lung Foundation and the British Heart Foundation have to be congratulated on their stance on the matter.

I have a number of suggestions, which are not part of the clause, that I wonder whether the Government would consider. With my own eyes I have seen how illegal, counterfeit and contraband cigarettes and tobacco reach the streets. Living in a place such as Gateshead, I do see that going on—cigarettes being sold from a holdall from the back of a car. An awful lot of that is not systematic, large-scale smuggling; it is done when people return from their holidays.

As a football supporter, on a number of occasions I have had the opportunity to follow Newcastle into Europe—[Interruption.]. There is no accounting for taste. I have seen groups of football fans—some are friends of mine—bringing back the maximum allowance through customs for personal use. Would colleagues believe that that allowance is 3,000 cigarettes? Three thousand cigarettes are being brought back through customs in holdalls, plastic bags or bin bags on a large scale. People say to each other, “You don’t smoke, but bring back your allowance”, and then they get sold on.

What is 3,000 cigarettes for personal use? For those who are unfortunate enough to have the addiction and need to smoke 60 cigarettes a day, that is 50 days’ worth of tobacco and, for those who smoke 40 a day, that is 75 days’ worth of tobacco. We are not part of the Schengen agreement, we do not have open borders and, frankly, I am glad about that in many respects. So, when people come through customs, they can be asked by customs officials, “Three thousand cigarettes—that is your personal allowance. Will you be smoking them?” A bit of investigation goes a long way. Customs officials should ask themselves whether the person looks like a smoker: does the person have tar stains on their fingers, or do they smell like they smoke?

Brooks Newmark (Conservative, Braintree)

I am a non-smoker as well as a non-drinker. Notwithstanding that, if the allowance is 3,000 cigarettes, that is what the rules are, so those people are not breaking the rules. Frankly, it would be wrong of customs officers to ask people whether that is for their personal use. Either the law should be changed, or the question should not be asked.

Ian Mearns (Labour, Gateshead)

The law is 3,000 cigarettes for personal use. So, if it is only for personal use, it is worth while for officials to ask the question sometimes, because I have seen that regulation flouted on numerous occasions, I am afraid to say.

Stephen Williams (Liberal Democrat, Bristol West)

Does the hon. Gentleman—my hon. Friend in this context—agree that one of the big problems in this area is that the tobacco companies over-export, to certain small European countries, a volume of cigarettes that it would be completely impossible for the smoking population of those countries to smoke themselves, specifically to facilitate this market back into the United Kingdom with the duty not paid?

Ian Mearns (Labour, Gateshead)

I concur with that entirely. Believe it or not, that happens in places such as Andorra. There is a huge trade in people going from the south of France to Andorra on a day trip to get huge amounts of cigarettes. They take them back into France, which they can do that without any problem, and then they transport them into the UK at the end of a holiday or whatever. The problem is that that tobacco is then sold on through contraband markets on the streets of the United Kingdom at a knock-down price, avoiding the duty that should be paid to the Treasury.

What my hon. Friend—in this context—says is absolutely true: the tobacco manufacturers are behind much of that trade. Despite the crocodile tears that they often cry, they are behind it, and that needs to be said out loud in the context of this discussion.

I will not go on any longer, but I want to leave Members from all parties with this vision: think of Wembley stadium, full of people. If those people were all smokers, next season half of them might not be there. The year after that, half of those people might not be there. That is because half of all smokers will die at a much younger age than would otherwise be the case. Anything that we can do to alleviate that problem, we should engage in, because that is our business.

Steven Baker (Conservative, Wycombe)

I am astonished that anyone still smokes. Anyone who, like me, has seen a loved one destroyed by a smoking-related illness knows what it can do, and anyone who can read can see the warnings on the packet. It must represent a profound challenge to those who believe in nudge that people still smoke at all. With all that in mind, will the Minister explain how the figures in the table in clause 179 were reached? We see figures such as “£176.22 per thousand cigarettes”, cigars at “£219.82 per kilogram”, and so on—why not a round number? Why not £175 per thousand cigarettes? Or £180, or £200? How do we get to these odd numbers if we are believers in nudge and want to take the issue seriously?

Sajid Javid (Conservative, Bromsgrove)

It is a pleasure to see you in the Chair again, Mr Amess. We have had a good, robust debate. It is fair to say that, unsurprisingly, all members of the Committee agree that cigarette smoking—tobacco consumption—is bad for one’s health, and that the Government are right to have a strategy, as did the previous Government, to try to reduce people’s tobacco consumption for precisely the health reasons that we have just heard about.

I thank the hon. Member for Nottingham East for his comments and what I take to be his broad support for the changes that we are discussing relating to clauses 179 and 180. I also thank the hon. Member for Gateshead and my hon. Friends the Members for Wycombe and for Bristol West for their comments. May I also take the opportunity to congratulate my hon. Friend the Member for Bristol West on what he has achieved? It may have been understated. On 31 May, World No Tobacco Day, the World Health Organisation handed out six awards to people in Europe who have made an outstanding contribution to fighting tobacco consumption. He was the recipient of one of those awards, which I think was awarded to him on 5 June. [Hon. Members: “Hear, hear!”] I congratulate him on that; it shows the passion that he has put into his work on this issue, which he holds very dear.

I will now address my comments to clause 179. Increasing tobacco duty rates reduces the affordability of smoking, which is widely acknowledged to be effective in encouraging smokers to give up smoking. It also deters young people from taking up the habit. The previous Government announced plans to increase tobacco duty rates by 2% above inflation until 2014-15. Such duty increases were incorporated into forecasts of the public finances, so failure to implement them would have led to a revenue shortfall.

Smoking causes almost 100,000 deaths in the UK every year, and is still the single largest cause of preventable illness and premature death. Treating smoking-related illnesses has been estimated to cost the NHS almost £2.7 billion a year. Maintaining high levels of tobacco duties is a key part of the Government’s strategy to reduce smoking.

Clause 179 will increase smoking duties by 2% above the retail prices index, as was pre-announced by the previous Government. The new rates took effect from 6 pm on 20 March 2013. The duty increases added 26p to the price of a typical packet of 20 cigarettes or a 25 gram packet of hand-rolling tobacco.

Research has consistently shown that the price of tobacco products affects demand. By increasing the duty on tobacco, we hope to reduce smoking prevalence, which would bring significant positive health impacts. It will help to reduce health inequalities and reduce the cost to the NHS of smoking-related illness.

John Pugh (Liberal Democrat, Southport)

The Minister has to be clear that not all counterfeit or smuggled tobacco is sold from the back of a white van; some is found in shops and looks very similar to tobacco that is legally imported or not counterfeit. On packaging, there is now technology that enables people to be able to tell through track and scan whether tobacco has had duty paid on it. However, it is questionable to what extent that is available to either trading standards or Customs and Excise. Would the Minister care to comment on that, because it is crucial to getting the money into the Revenue?

Sajid Javid (Conservative, Bromsgrove)

Of course I will comment on that—I was moving on to the broader topic of the illicit trade in tobacco, which was raised by a number of Members. In terms of providing more information on the Government strategy, we are fully committed to tackling the illicit trade in tobacco and ensuring that smuggling does not undermine the health and revenue benefits of real increases in tobacco duties.

Following the 2010 spending review—the issue of resources was raised by my hon. Friend the Member for Bristol West—HMRC has invested £25 million to further strengthen the strategy and maintain downward pressure on the illicit market. Hon. Members have talked about new technologies that can potentially be used, such as packaging and tracking. HMRC keeps such things under constant review and looks at best practice and what other countries might be doing. At this point I cannot commit to any particular new method that we might adopt, but I can assure my hon. Friend that we are constantly looking at new methods to try to tackle the illicit trade.

On the results of HMRC’s activities, the illicit market for cigarettes has reduced from 21% to 9%, and for hand-rolled tobacco from 61% to 38%, since the launch of the first tobacco anti-fraud strategy in 2000. The latest industry estimate suggests that non-UK duty-paid consumption is beginning to increase. However, the data do not disaggregate illicit consumption from legitimate cross-border duty-free shopping.

The hon. Member for Gateshead talked passionately about the number of cigarettes that individuals are allowed to bring into the country for personal consumption. He mentioned 3,000, but the number was 3,200. However —I am sure he will support this—that number was drastically reduced to 800 by the Government at the end of 2011, so it is currently 800. That is the lowest that we thought we could go to and at the same time stay within EU rules. We have taken the toughest stance that we could on that allowance. I hope that that helps to allay the hon. Gentleman’s concerns.

James Duddridge (Conservative, Rochford and Southend East)

Can the Minister confirm whether it is a personal allowance only for personal use? I can draw an example from Irish whiskey, but it could apply equally to smoking. I am not sure whether Mrs Duddridge or I—perhaps both—have committed a criminal act. She recently went to Ireland and brought back a bottle of Irish whiskey. Mrs Duddridge has never consumed whisky and it was never intended that she would consume it. What if I consumed it? It could very much apply to cigarettes. Has she committed a criminal act? Or, if I had brought back cigarettes and offered one to my hon. Friend in the Strangers Bar this evening after a pint of Sajid’s beer, would we both be committing a criminal offence?

Sajid Javid (Conservative, Bromsgrove)

I thank my hon. Friend for his question. He is right to assume that it is for personal consumption. That is the intention of the rules. I am sure he understands why such a restriction is in place. I cannot comment on an individual case without knowing the details. I hesitate to do so. However, if it is a gift for someone, without charge, that is acceptable. I hope that that helps to allay his concerns.

On prosecution rates, as the illicit cigarette market has steadily declined over the past two years, nearly 3.6 billion cigarettes and more than 1,000 tonnes of hand-rolling tobacco have been seized. There have been 431 prosecutions and more than 1,600 assessments and penalties issued.

My hon. Friend the Member for Bristol West raised the issue of media and advertising. HMRC has a national media and communications strategy that optimises the use of free media opportunities to amplify its impact. It works in collaboration on joint communications programmes with other parts of government and other non-government entities, such as the Work for England programme, to try to change behaviour and attitudes towards the purchase of tobacco and the tobacco trade in general. My hon. Friend mentioned that there might be some room for improvement, and I am more than happy to sit down with him and discuss in more detail any fresh ideas he has on this important subject, if he would find that useful.

Finally, my hon. Friend the Member for Wycombe raised the issue of the numbers, how they are reached and whether they are rounded. They are simply calculated by uprating last year’s figures. We try to be as accurate as we can be in the presentation of those numbers.

Sorry, I have noticed one more question, which was about packaging and was asked by the hon. Member for East Lothian. The Government still have an open mind on standardised packaging and any decisions will be made after full consideration of all the consultation responses and evidence we received. Her Majesty’s Treasury and HMRC will work closely with Department of Health colleagues in reaching that decision, but that is rightly a Department of Health process.

Fiona O'Donnell (Labour, East Lothian)

I wonder whether the Minister will take this opportunity to correct the statement made by the Prime Minister during his speech on the Queen’s Speech about the absence of a Bill. He said that consultation was still open when it in fact closed last year.

Sajid Javid (Conservative, Bromsgrove)

I hope that I have already addressed that point. I am happy to state that the consultation responses have been received and that consultation is closed. We are now considering evidence and any other relevant information we have to make the decision.

Stephen Williams (Liberal Democrat, Bristol West)

In the context of the Minister’s ideas of where a small amount of expenditure may go a long way, I refer him to the intervention made by my hon. Friend the Member for Southport on the equipment for assessing whether duty has been paid on a box of cigarettes. My understanding from talking to some trading standards officers is that this equipment, which is a small handheld device—it is not big—is not widely available to trading standards officers in local government. The tobacco companies have their own, because it is in their interest to ensure that duty is paid and that counterfeit brands are not being sold. A small allocation of additional resource within the agreed budget may make a big difference for trading standards officers.

Sajid Javid (Conservative, Bromsgrove)

My hon. Friend refers to the tracking equipment and its possible use, and I can confirm that we are discussing the matter at EU level with partner nations. We are looking at the matter as part of our review of the tobacco directive. I hope that that reassures him that we are taking the matter seriously and that we are looking at adopting the equipment and taking it further.

Clause 180 makes changes to the tax treatment of herbal smoking products to align UK legislation with the European directive on the structure and rates of excise duty on manufactured tobacco. The change was announced at Budget 2012 and will come into effect from January 2014. It will ensure that herbal smoking products no longer enjoy an unfair advantage over tobacco smoking products. Herbal smoking products will be treated as if they contain tobacco and will be liable to tobacco products duty. Herbal smoking products that are used exclusively for medical purposes and licensed as such will remain exempt from tobacco duty.

Herbal smoking products include herbal cigarettes, herbal pipe tobacco and herbal water pipe tobacco. Herbal smoking products do not contain nicotine, but there is no evidence that they are any less harmful than tobacco products. Herbal smoking products are exempt from excise duty. That provides an unfair advantage over tobacco-based smoking products and contravenes the European directive on tobacco taxation. The directive states that products consisting of substances other than tobacco that conform to the criteria of cigarette and smoking tobacco shall be treated as such for duty purposes. It also states that herbal smoking products that are used exclusively for medical purposes shall be exempt from excise duty.

The changes made by clause 180 will create a level playing field by imposing a duty liability on herbal smoking products at the same rate and in the same way as their tobacco equivalents. The Government are committed to encouraging smokers to quit and discouraging young people from taking up tobacco.

A couple of questions were raised on the matter, and I hope I have answered the first one. The hon. Member for Nottingham East asked about switching from herbal tobacco to regular tobacco. Evidence shows that herbal tobacco is no less harmful than other tobacco products. There will be an exemption for where herbal tobacco is consumed solely for medicinal purposes. That will be through a marketing licence granted by the Medicines and Healthcare products Regulatory Agency, an independent regulatory body that is responsible for ensuring that medicines work and are acceptably safe.

Stephen Williams (Liberal Democrat, Bristol West)

I apologise for making so many interventions. This will be the last one, and it is about the effect of smoking a shisha pipe, or hookah as some call it. Many people think it is a relatively harmless activity, but one session on a hookah pipe is the equivalent of smoking about 80 to 100 cigarettes. It is incredibly harmful.

Sajid Javid (Conservative, Bromsgrove)

My hon. Friend makes a good point. He is right to emphasise that it is not well understood how damaging some herbal tobaccos can be to one’s health.

The hon. Member for Nottingham East also asked about guidance and the impact on manufacturers and importers. First, a very small number of manufacturers and importers deal with herbal tobacco in the UK. They will face one-off costs that will apply under the Bill. HMRC is working closely with the businesses that are affected to help to ensure that the changes are well understood and comply with the new legislation. One reason why the provision will come into effect on 1 January 2014 is to give businesses time to adjust.

Clause 181 - Rates of gaming duty

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 181 is a fairly small and technical clause, so I will not detain the Committee long. As I am sure hon. Members know, gaming duty is the duty charged on premises in the UK where dutiable gaming takes place, which includes casino roulette, baccarat and blackjack. I do not suggest that any members of the Committee are fully au fait with those forms of entertainment, but we are focusing here on their taxable nature. The duty is calculated by reference to balance. As with last year’s Finance Bill, this measure increases the bands in line with inflation, in this case RPI, which is calculated at 3.1%. I have just a small question of clarification for the Minister: how much extra revenue will the Exchequer receive as a result of the rise, and has the Exchequer assessed the possible impact of the rise on the industry?

Sajid Javid (Conservative, Bromsgrove)

Clause 181 increases the threshold for the gross gaming yield bands for gaming duty in line with inflation. Gaming duty is a banded tax and paid by casinos in the UK with marginal tax rates varying between 15% and 50%. The public finances assume that the bands are revalorised in line with inflation each year to prevent fiscal drag. Without annual revalorisation, casinos would pay gaming duty at higher rates over time. The change revalorises the banded gaming duty in line with inflation. It is expected by the industry and assumed in the public finances. The rates of gaming duty will remain unchanged. The change will take effect for the accounting period on or after 1 April 2013.

The hon. Lady asked about additional revenues. The gaming duty system is designed progressively to ensure that the most profitable casinos pay the highest rates, with the top rate currently set at 50%. The system ensures that casinos pay their fair share of overall gambling tax receipts. The will have no impact. There is some nominal extra revenue, but there is no change in real terms.

Clause 182 - Combined bingo

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss new clause 5—Rate of bingo duty—

‘The Chancellor of the Exchequer shall within six months of the passing of this Act provide a report to Parliament on the impact of bingo duty on—

(a) the level of employment in the bingo industry, and

(b) the competitiveness of the bingo industry relative to other gambling industries.’.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As the Committee will no doubt be aware, bingo duty is charged at 20% of a person’s bingo profits and is calculated by reference to receipts and expenditure on winnings. Combined bingo, however, is where a game is played simultaneously in more than one place and promoted by more than one person, such as the national bingo game, which allows players in different bingo clubs to share in the chance of winning a prize from a prize pool generated by the moneys contributed by all participating clubs.

To prevent double counting of payments transferred between promoters as contributions to prize funds, special accounting provisions apply to combined bingo. As the legislation currently stands, a qualifying condition of the accounting provisions is that all participants must play from within the UK. At Budget 2012, the Chancellor announced his intention to remove the qualifying condition and, following an informal consultation in the summer of 2012, the clause legislates for that removal.

As a result of the consultation, the measure will not come as a surprise to the industry, but I want to touch on a couple of points. The impact note for clause 182 states that the current law prevents the

“double-counting of receipts but, as an anti-avoidance measure, this provision only applies where the combined bingo is played entirely in the United Kingdom.”

I want clarification on that, because it suggests that at present the restrictions are in place to ensure that tax avoidance cannot take place when games are run. Will the Minister confirm what anti-avoidance measures will be put in place once the restrictions are removed? Will the Minister also give us some information regarding his assessment of the risk of tax avoidance once the restrictions are removed? Can he comment on HMRC’s assessment that

“by removing this restriction larger jackpot prizes may be offered for games of combined bingo which may indirectly benefit those individuals who participate”?

Can the Minister give us an indication of the numbers involved, such as the number of businesses likely to be affected by the clause? What is his assessment of the number of new combined bingo games that might become available to players in this country as a result of the changes? What will be the regulatory impact of the measure? Will, for example, non-UK operators be required to apply for a licence in this country in order to link up with UK-based bingo operators to engage in combined bingo?

In addition to those questions for the Minister on combined bingo, I want to propose a few questions on new clause 5, which we tabled to shine a light on the issues facing the bingo industry and to probe the Minister on what consideration the Government have given to the impact of those issues. The bingo industry is important to our country and our economy. Provisional 2012 data show there are approximately 400 bingo clubs providing direct employment for more than 12,500 people. In 2012 there were approximately 45 million player admissions to bingo clubs, generating more than £200 million a year in tax revenue for HMRC. Despite the contribution bingo clubs make to the economy, which was recognised in the Mary Portas review last year and the ResPublica study, many in the bingo industry continue to feel they are getting a poor deal compared with the rest of the gambling sector.

I am sure the Minister is aware of the recent history of bingo taxation in this country. In 2009, the then taxation regime—15% plus VAT—was replaced by an increase in gross profits tax from 15% to 22%, with bingo clubs becoming partially exempt for VAT reclaim purposes. GPT was then reduced to 20% in 2010. However, the industry remains concerned about its inability to reclaim all its VAT, which has led to investment and refurbishment costs remaining high.

The industry further criticised the Government’s introduction of the machine games duty in February 2013, which, according to industry figures, hit bingo clubs with an additional £9.25 million in tax each year. The industry has made clear that it is concerned about the impact of the taxation rise on the sector, which has resulted in bingo having one of the highest starting rates of all gaming activity in Britain. Bingo clubs play an important role, not just in the economy but in the lives of the many people who enjoy and take part in it, and for whom it is a social event in their calendar. Bingo clubs are currently closing at a rate of one a month.

Rory Stewart (Conservative, Penrith and The Border)

Does the hon. Lady agree that that is particularly true for rural populations and the elderly, for whom bingo is an important contribution to life? There is a big demographic issue here. There is a portion of the population for whom bingo is particularly important at the moment.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the hon. Gentleman for his intervention. He speaks for a rural constituency, so he is very conscious of these issues. I have to say, I know an awful lot of young people who play bingo; it is surprisingly popular among my friends and colleagues. However, I agree that we need to take into consideration the demographics of those who take part in bingo, and the rural and geographical implications of the closure of bingo clubs and halls. It is obviously devastating for people for whom bingo is their main social event in the week or the month.

The industry has argued for a reduction of GPT to 15% to help reverse this trend and for bingo taxation to be put on the same footing as the taxation on other gaming industries. It states that its target level of 15%, which it believes to be a fair amount, would lead to further capital investment. Gala is planning £29 million of capital investment, and Mecca Bingo has pledged to open new clubs if the tax rate is reduced to that level.

The Bingo Association expects, using a demand elasticity based on observed data from both the 2004 and 2010 rate changes, a 15% rate of gross profits tax to stimulate growth that could return the sector to 2008 levels of activity—when they were last at their highest—by 2014. It is an ambitious target, but it believes it has the data to back that up. Given those figures, it would be helpful if the Minister could outline the Government’s reasoning behind the decision to put bingo GPT at the current rate. What assessment have the Government made of the cumulative impact of both the current rate of GPT and machine games duty on jobs and growth in the bingo sector? I am sure the Minister will have received many considered representations from those in the industry about reducing the rate of GPT. What assessment has the Department made of the impact that reducing the rate of GPT would have on the Exchequer and the industry? Will he also explain a little about the decision to tax bingo at a higher rate than other parts of the leisure sector? Does it relate to any social or economic policy objectives of the Government?

I want to be clear that we do not wish, with this proposed new clause, to suggest that other areas of the leisure or gaming sector are receiving a good deal compared with bingo. We are merely trying to probe and establish whether bingo is receiving a poorer deal in comparison. We are asking the Government, for the reasons I have set out, to commit to a review so that the full impact of the current taxation regime on bingo can be fully understood.

Fiona O'Donnell (Labour, East Lothian)

It is a pleasure to see you back in the chair, Mr Amess. I am not sure whether you have ever played bingo, Mr Amess. I see you nodding; that is an interest. The first time I played bingo was in 1982 at the Royal British Legion club in Kilkenzie? I decided to play one card, thinking that that would tax me enough—“tax” being the operative word today—and did not understand that the lines were in units and tens. Every time a number was called I quickly scanned, and was amazed by all the, mainly, women who were managing with three or four cards.

I speak in support of our new clause 5, because there are serious concerns, as the hon. Member for Penrith and The Border mentioned, especially for older people and in rural constituencies. It is great that in my constituency we have free bus travel for older people, so they are able to come out during the day and spend time in one of the local bingo clubs. Increasingly, bingo clubs provide a really important service in preventing isolation for older people in rural communities. The sad reality is that for many older people it means that they can turn off the heating at home and sit during the day in a warm environment and have social interaction with people of their own generation. That is many older people choose to spend time in a bingo club.

I do not have the same concerns about bingo clubs as I do about online gambling. On that subject, I wish that there had been an opportunity in the Bill to talk about off-shore gambling and its impact on the horse racing industry in this country. However, I am aware that is not the subject of new clause 5, so I will move on.

The atmosphere in a bingo club is responsible and social. We do not need to be concerned about them in the same way as about online bingo because we do not see the excesses that we do online. I was concerned recently was to hear one online bingo site boasting that it had given £5 million in prizes last year. That prompts questions about how much money had been spent on the site, often by people sitting at home on their own, with no restriction on access. People can get carried away and not realise how much they are spending and how much debt they are building.

I hope the Minister will welcome new clause 5, because it is an opportunity to pause and ensure that there is no detrimental impact. That impact could be on income to the Treasury; on economic growth in some communities through investment in refurbishing, as my hon. Friend the Member for Newcastle upon Tyne North said. There is also the general health of the high street. Where there is a bingo club, as is the case in Musselburgh in my constituency, people coming out to play bingo will pick up a paper and perhaps buy a dabber for marking off the numbers. That provides a boost for the whole high street, not just for the bingo club.

I hope that the Minister will welcome this opportunity to assess the impact on the Treasury’s take and on local communities, and the social impact on older people who, in the main, use bingo clubs as a way of staying socially active—and, sadly, keeping warm.

Sheila Gilmore (Labour, Edinburgh East)

It would be wrong to give the impression that absolutely everybody who plays bingo is elderly, as that might suggest that it is an industry that is about to disappear. It certainly does cater for that demographic, but there is a wider age range than some might expect. It may be true that there are more female bingo players than males. We see mothers and daughters going together; in that sense, it is a family outing.

Fiona O'Donnell (Labour, East Lothian)

Does my hon. Friend agree that the opening hours during the day are convenient to older people? Those people may not have access to the internet and online gambling, which may be a blessing, but for older people bingo is a unique service during the day.

Sheila Gilmore (Labour, Edinburgh East)

I certainly agree that there is that element. We are dealing with relatively low-level gambling in terms of the stakes and the amount that people can spend. Indeed, unlike in some other forms of gambling, the outlay is relatively low; it is probably not dissimilar to other social activities, unlike machine gambling activities or, even worse, online gambling.

Pamela Nash (Labour, Airdrie and Shotts)

I support my hon. Friend’s point about the younger generation going to bingo. In recent years, many of my friends have started to have children and we often swap a night in a nightclub for a night in a local bingo hall. In fact, Gala Bingo now does a disco night for young people, which I have participated in.

Sheila Gilmore (Labour, Edinburgh East)

I am not sure what is worse: a night in a club or a night at bingo. I suspect, however, that bingo allows people to get to sleep earlier, which must be beneficial.

In terms of tax, during the last three years in particular—but perhaps for even longer—the industry has been subject to a lot of changes and alterations that have made things difficult for those who work in the industry. The accumulation of those changes, with, most recently, the impact of machine games duty, makes them feel that the tax system is not giving them the support that they need.

We all know of bingo halls that have had to close down. Undoubtedly, there will be other reasons why some halls found it difficult to survive, but, faced with difficulties and concerns—many were concerned by the smoking ban, for example—many have sought to reinvent themselves to appeal to a wider audience and to keep functioning. Most—not quite all—in my constituency have managed to keep functioning. Having done that, however, they need some certainty on what the tax will be, and for that not to change, but also they need to feel that they are not being placed in an adverse position, even in relation to other forms of gambling, as they are subject to competition.

New clause 5 relates to issues that have come up in previous Finance Bills. We now need to assess what is going on and to be fair to the industry. We need a proper review to determine whether we are taxing it appropriately, or whether there could be better taxation arrangements that would protect it.

Chris Evans (Labour, Islwyn)

Thank you, Mr Amess, for calling me again. As a member of the Caravan Club, you know that bingo is a mainstay of many of our rallies. I want to speak in defence of the gambling industry. My father was a bookmaker; my grandfather was a bookmaker; so I am a son of a bookmaker’s son. I want to talk about the problems we have with the gambling industry in general. Bingo is seen as the acceptable face of gambling. I held an event with William Hill recently at the Commons and every time representatives of the betting industry come here they feel they have to defend themselves—

Ben Gummer (Conservative, Ipswich)

I agree with the hon. Gentleman. He is an honourable man and I am sure his family is too in their profession. His leader was in my constituency a few weeks ago lecturing us all about how there were far too many betting shops in the high street—reputable ones, good ones that people enjoyed using, which employed people, made money and gave people a bit of leisure betting. He was telling us all that they should be empty. Does he support his leader’s position on that?

Chris Evans (Labour, Islwyn)

My general attitude is that I would walk into the shop and see how it was. I would defend the betting industry to the hilt because this is my family’s business. There is a version of the betting industry and it is not the one I recognise. I see that 53% of people who are employed in the industry are women. It is a flexible, part-time occupation. The betting industry has a problem with the way it promotes itself. It is being labelled with the pawnbrokers and the moneylenders and all these other bloodsuckers we see on the high street. In reality, people go into a betting shop because they are interested in sport. I will be honest. I have been in the betting industry all my life and I have not met a problem gambler yet. Most people talk about fixed odds betting terminals and amusement with prizes, but the average punter does not like FOBTs anyway because it distracts them from the horse racing.

I want to put on record my feelings about what I think is a good industry. When alcohol or beer groups come to the House—the Minister mentioned the beer from his constituency in Bromsgrove—the alcohol industry is proud that it sells beer. It is proud of what it does. Yet all the betting industry does is defend itself over problem gamblers. I feel it should promote a British tradition. There is no better tradition than bingo. I pick on the hon. Member for Bristol West an awful lot about the valleys. He will remember that one of the features of the valleys is the bingo hall. The saddest thing you see when you go round the valleys now is the almost Art Deco buildings being boarded up because bingo has died out in most communities. It is so important for older people. My grandmother still goes to the Tylorstown Con every week, where she can play Housie and play on the Snowball or whatever. She enjoys that and it is part of her community. She likes to see her friends and get together there as well.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend makes a passionate and personal case for supporting this industry. He mentions his grandmother and the social side of bingo and gambling. For many elderly people, it keeps their brains active. It keeps up their interests. It is a bit like Sudoku for many people in exercising their brains, which is so important when we see the rising levels of dementia, Alzheimer’s and those difficult conditions that a lot of people develop in their later years.

Chris Evans (Labour, Islwyn)

I agree. One of the big things that older people face is loneliness. They lose their spouse and have to learn to live on their own. It is important that, when they go to bingo, they are allowed to mix and meet friends, and to share experiences. That is something that cannot be measured in a Finance Bill or by taxation. When the Prime Minister was the Leader of the Opposition, he said that we should not measure GDP without taking into account the feel-good factor and quality of life. That is important with bingo.

Bingo is one of the industries that have been victims of the double taxation rule. I am glad that that has now come to an end, but the bingo tax—the gross profits tax—should be reduced to 15%. As for bingo halls themselves, it is the same as with betting shops: we have to remember that there are not many gamblers in the shops any more—certainly that is the most important difference I can see from when I worked in the industry. That is why I have a big issue about problem gamblers: the problem gambler is probably gambling in private, on his iPhone or online. That is what we see with the betting industry now: the real competition for bingo is not in the betting shop but online—we often see Foxy Bingo or Sun Bingo sponsoring all sorts of programmes on ITV. The real and important issue is how we get people back into the bingo clubs.

I want to make the case for a tax cut for bingo. An additional £9.25 million tax has been added to the bingo industry with the introduction of the machine games duty, and I know that the Minister will be lobbied hard by those who are anti amusement machines and FOBTs. What are his thoughts about those industries? The bingo hall or betting shop is being squeezed by the internet and other competitors.

Sajid Javid (Conservative, Bromsgrove)

Clause 182 relaxes the tax rules for combined bingo and will benefit UK bingo clubs. By way of background, combined bingo is a game of bingo promoted by more than one bingo operator and played in many locations simultaneously. In effect, it refers to when bingo clubs groups together to offer larger and more attractive prizes to consumers.

The current tax rules for combined bingo apply only to UK bingo clubs. That means that if a UK bingo club joins with a non-UK club to offer combined bingo, it will be liable for a disproportionately larger bingo duty charge. The clause relaxes that rule and will allow UK bingo clubs to join with non-UK clubs to offer combined bingo without causing the UK bingo operator to incur additional duty.

The clause has been welcomed by the bingo industry. It encourages bingo clubs to expand their customer base and to grow their businesses. An informal consultation with industry representatives was held last year and draft legislation was shared with them in December. As I have said, the industry welcomed the change.

New clause 5, tabled by the Opposition, would compel the Government to publish a report on the impact of bingo duty on the bingo industry. The Government carefully consider gambling tax rates and the potential impact on affected industries each year at the Budget, and will continue to do so, to ensure that gambling businesses continue to make a fair contribution to the public finances. To that extent, the new clause is unnecessary, as the Treasury keeps taxes under review at all times. I will therefore be asking Opposition Members not to press the new clause.

First, however, I will turn to some of the questions raised by hon. Members.

Ian Mearns (Labour, Gateshead)

I am not sure whether the Minister is an avid bingo player. One aspect of the development of the game that I keenly regret is the demise of the idiosyncratic way of calling bingo numbers: things such as, “Five and nine—the Brighton line,” or, “Doctor’s orders—number nine,” or, “Kelly’s eye—number one,” or, “Two horizontally challenged persons—88.” It was an idiosyncratic way of doing it, but it was actually quite entertaining in its way. Nowadays, when I have gone into bingo clubs in the north-east, I have found that the way they churn the numbers over and get the games out quickly is a bit industrial.

Sajid Javid (Conservative, Bromsgrove)

If the hon. Member for Gateshead ever chooses not to be a parliamentarian any more, I can think of an alternative career that he would be a great success in. The answer to his question is that I have played bingo, but I certainly would say that I am not an avid player. Perhaps one day I will be. It is an important industry.

Many hon. Members spoke, including my hon. Friend the Member for Penrith and The Border, who intervened, and the hon. Members for Edinburgh East, for East Lothian and for Islwyn. The hon. Member for Islwyn spoke with great passion, given his family experience. I listened carefully, and I think that he, along with other hon. Members, made good points. Many hon. Members pointed to the social value of bingo, which I recognise.

In that vein, I think all hon. Members will join me in welcoming the change to combined bingo rules, which, as I said, has been welcomed by the industry. It is a positive change; it is an opportunity for UK clubs to link with non-UK clubs. Although it is voluntary, it increases the flexibility of clubs and will hopefully lead to new businesses and more jobs.

The hon. Member for Newcastle upon Tyne North asked about the potential impact. It is difficult to measure that. We also asked the industry. Although it lobbied hard for the change and clearly welcomes it, it is hard to put any numbers on the issue. I think it is fair to say that the impact of this particular change will probably be minimal, because not all clubs would be interested in the new combined bingo rules.

The hon. Lady also asked about anti-avoidance measures. Combined bingo rules have existed for some time—albeit not on this basis, but they are long-standing rules. When we looked at the potential changes, we were comfortable that no new anti-avoidance measures would be necessary. However, we will keep a close eye on the matter and ensure that if changes need to be made and if anti-avoidance measures are necessary, we will not hesitate to make them.

As I said, I recognise the positive social impact of bingo. The Government are currently reviewing the stake and prize limits for gaming machines, following a public consultation that closed on 9 April; the hon. Member for Islwyn raised the issue of gaming machines. The Government’s initial preferred option is to increase stake and prize limits for some gaming machine categories, which would benefit bingo halls. Once the Government have made a decision, I will be sure to share it with hon. Members. The issue of larger prizes was also raised. That could be a result of the change.

I was asked whether the Government had assessed the new games that might come into existence due to the change. Clearly, there will be new games, but HMRC has not directly assessed what and how many new games there will be. I think that that is unnecessary.

Pamela Nash (Labour, Airdrie and Shotts)

I seek clarity in the Minister’s comments. Recently there has been a high-profile campaign against fixed odds betting terminals, seeking to reduce the maximum stake available to players on such machines. Is the Minister saying that the Government are looking to increase the stake?

Sajid Javid (Conservative, Bromsgrove)

Yes. We are reviewing stake and prize limits. We are looking at potentially increasing them for certain types of machines. I emphasise that no decision has been made at this point. When we look at the matter further, we will look at its potential impact and provide the information to hon. Members.

I was also asked whether the Government have estimated the impact if the rate of bingo duty was decreased to 15%. Our estimate is that such a decrease would lead to a reduction of tax revenue of approximately £30 million a year. If that is the case, clearly we would have to find a way to fund the reduction in revenues already assumed in Government finances.

The impact of machine gaming duty was raised by hon. Members, and it was suggested that it might hurt bingo halls. Machine gaming duty is designed to be revenue-neutral for the Exchequer. The impact on different businesses will vary, but the change will ensure that machine operators continue to make a fair contribution to tax receipts.

Lastly, I want to touch on the important issue of online gambling, which the hon. Member for East Lothian mentioned. Although it is not the subject of the clause, it pertains to the issue of having a level playing field for gambling taxes. She will know that we are introducing a remote gambling reform, on the basis of the place of consumption, to create a fairer playing field. I am sure she supports that reform. It will ensure that all gambling businesses that target UK consumers, no matter where they are based in the world, make a fair contribution to UK tax. The reform will help to create a level playing field for gambling operators based in the UK and those based overseas.

The clause makes a small, uncontroversial change to bingo duty, and benefits the bingo industry. I ask hon. Members to consider not pressing new clause 5, and I hope that clause 182 will stand part of the Bill.

Clause 186 - Not exhibiting licence: period of grace

Catherine McKinnell (Labour, Newcastle upon Tyne North)

This is another short, technical clause, which replaces the current five-day waiver on vehicle owners displaying a newly issued tax disc in their vehicle with a 14-day waiver. It is a welcome change. It follows on from the Government’s Budget 2012 aim to reduce the DVLA’s tax disc postage costs. The measure will have effect on and after the date this Bill receives Royal Assent. The Government’s stated intention is for the DVLA to centralise its issuing of tax discs on to call centres and internet applications to save administration costs, although tax disc applicants will still be able to receive their disc directly from the Post Office if they so desire.

I am sure many people welcome the streamlining of the process of applying for tax discs, resulting from the centralisation of the information that is required to get a tax disc issued. Will the Minister say a few words about the process of centralisation? Can he give us a breakdown of the expected cost saving of the administrative centralisation, the number of jobs involved, and what the time frame for completing the centralisation is? The centralisation is intended to save on postal costs. Will the Minister confirm how much of the saving is expected to come from postal costs, and how much is expected to come from job reductions in the newly centralised process?

The impact note states:

“The Driver and Vehicle Licensing Agency (DVLA) will save at least £1.5 million a year in reduced postage costs.”

Will the Minister give us a breakdown of where those savings will come from? Will they be simply from the change in postage costs—presumably from first class to second class—or will there be other associated cost savings as a result of the change? Will he also provide an updated figure for the number of licences expected to be granted, and a figure for those expected to be posted rather than directly collected from the post office? I am sure the Treasury has undertaken that assessment as part of processing this change.

Steven Baker (Conservative, Wycombe)

May I invite the Government to extend indefinitely the grace period for not exhibiting a licence? In other words, will they abolish it altogether? The motorist already pays for the roads many times over through fuel duty, and the country is so festooned with automatic number plate recognition cameras automatically checking whether our vehicles are insured and MOT-ed that there can be no reason whatever for continuing with the licence. Why not just abolish it altogether and make some considerable administration savings?

Sajid Javid (Conservative, Bromsgrove)

Clause 186 provides for a 14-day grace period against the requirement to display a newly issued vehicle licence tax disc. The existing display waiver period applying to licence renewals is five working days and was introduced by the previous Government in 2008. The clause will extend that period to 14 days and create further situations where the waiver will apply, so that it is no longer limited to simple tax renewals but also supports applications for tax discs where a vehicle’s status has changed.

The change to the waiver has several benefits. First, it will enable the Driver and Vehicle Licensing Agency to reduce tax disc postage costs. The agency intends to issue tax discs via second-class mail from a single central point rather than the current practice of issuing tax discs via first-class mail through local offices. It is estimated that that will save some £1.5 million a year, and I can confirm to the hon. Member for Newcastle upon Tyne North that that amount comes just from postal cost savings. She also asked about the impact on jobs, but we have made no such assessment, so I cannot give her more information on that.

Secondly, the change increases the convenience of the online and telephone electronic vehicle licensing service to taxpayers. Taxpayers will for the first time be able to use the service when licensing a newly acquired second-hand vehicle or returning a vehicle to the road after a period of storage. The option to obtain a tax disc immediately at a post office will remain.

Finally, the change will reduce the burden on motor dealers by removing the need to collect blank tax discs, store them securely and manually issue them to each customer. Tax discs will instead be sent directly to customers by the DVLA, which will have the positive effect of removing the indemnity that motor dealers have had to hold as insurance against the loss of tax discs, thus reducing the financial burden on the motor dealer industry.

The measure is not just a cost-saving exercise, because it will reduce the administrative and financial burden on motor dealers who register and licence new vehicles. It will also give motorists more flexibility to continue to drive while waiting for a tax disc to arrive. The measure has built-in contingency to cater for any disruption to the postal service.

Further to the hon. Lady’s question about jobs, I have just had a moment of inspiration and I can tell her that we believe that there will be no impact on jobs as a result of the change in posting practice.

To conclude, the measure enables the DVLA to deliver significant efficiency savings while reducing the burden on businesses and motorists.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My question related more to the process of centralisation rather than simply the switch to concentrating on postal delivery for tax discs rather than using the post office. I appreciate that the Minister may not have that information available, but I just wanted to make that clarification.

Sajid Javid (Conservative, Bromsgrove)

I do not have specific information on centralisation. I will check to see whether there is any more information once I have contacted the DVLA. If there is, I am more than happy to write to her and furnish her with that information.

James Duddridge (Conservative, Rochford and Southend East)

I am minded to support my hon. Friend the Member for Wycombe in his pursuit to abolish this tax altogether, and I somewhat regret that neither he nor I tabled an amendment on the matter. The reason is that we already have a distribution method of collecting tax equitably through fuel duty, but I wonder what the cost is. Specifically, what is the cost of this individual process? I own a Toyota Yaris and pay only £35 in tax—it is a good vehicle in relation to the certificate that goes on the window. I cannot possibly believe that the Government managed to process that tax disc at a cost below £35.

Sajid Javid (Conservative, Bromsgrove)

I am glad that my hon. Friend has raised that issue, because it has prompted me to give a response. I also thank my hon. Friend the Member for Wycombe for his views. They might know that the excellent Secretary of State for Transport has published a consultation on a number of issues, including the potential abolition of the paper road tax disc. The Government are considering a response and will publish our decision on whether we are ready to abolish the disc.

Ben Gummer (Conservative, Ipswich)

Would it be possible to refer the matter to the Office of Tax Simplification to see the effects of amortising the revenue from tax discs across fuel duty?

Sajid Javid (Conservative, Bromsgrove)

I have heard my hon. Friend and will take on board his representation.

Steven Baker (Conservative, Wycombe)

I listened extremely carefully to what the Minister has just said, and I think that he intimated that he might abolish the paper disc, but not the tax itself. Will he just explain whether he means to consult on abolishing the tax as well as the disc?

Sajid Javid (Conservative, Bromsgrove)

I think my hon. Friend knows the answer to that question, but it is incumbent on me to be clear that I am talking about the paper disc and not the tax. I do not think that that will surprise him. To put some perspective on the matter, the vehicle excise duty raises approximately £6 billion each year, which is vital revenue for the Government to pay for public services. The actual cost of the paper system that the DVLA administers is approximately £8 million a year, and we are considering how to reduce that figure. The paper disc costs money to produce and is delivered to the post office or through the post, which is why the Department for Transport has run a public consultation and is seeking the views of motorists and businesses. Most on-the-road enforcement action is now based on digital technology, which is the automatic number plate recognition system rather than visual inspection of the disc, which is a helpful innovation.

Clause 187 - Vehicles not kept or used on public road

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As many classic car enthusiasts will know—we may have some on the Committee— the statutory off-road notification is required by the DVLA when a vehicle is not being used on a public road and therefore does not require vehicle tax. SORN was introduced in January 1998 and it applies to all vehicles licensed on or after that debate.

I will allow the Minister to explain, if he deems it necessary, the thinking behind the changes that are being proposed. I will jump straight to my questions, because I want him to clarify a few points about the changes to the regulations. Will he confirm when the relevant regulations will be amended, how much the DVLA is expecting to save from the changes and in what ways it will make those savings? In other words, how many vehicles and owners are likely to be affected by the changes? Will there be any change in how vehicle owners can make a SORN declaration once the change takes place? An original reason for introducing SORNs was to enable the DVLA to keep up-to-date information and maintain accuracy on the vehicle register, to aid the police who rely on DVLA records when investigating vehicle-related crime and fraud.

Will the Minister clarify whether any assessment has been made of the potential impact of the changes on the detection of vehicle-related crime and fraud? Has he considered any change in penalties for failing to declare a vehicle in a SORN, following this change, given that owners could have failed to make a SORN declaration for many years now, rather than simply months, as under the current legislation?

Sajid Javid (Conservative, Bromsgrove)

The clause is the first stage in the legislative process for making statutory off-road notification declarations across the UK indefinite, following the Government’s red-tape challenge, which took into consideration the public’s views on reducing road transport regulations, including the burden involved in making annual declarations of a vehicle’s continued storage away from the public road. Having listened to what the public said, the Government are now committed to removing the annual requirement, so that in future the declaration will be indefinite.

Some 2.4 million vehicle enthusiasts, such as classic car club members and motorcycle enthusiasts, keep their vehicles stored off-road for a long period. They will benefit from less bureaucracy. The move to an indefinite basis for the declaration also avoids the present unnecessary, inefficient engagement of tax enforcement processes set in motion when vehicle keepers forget to renew their annual declaration. It will contribute towards Government savings of some £3.6 million over the next 10 years. To support that policy intention, the clause removes from primary legislation defunct references to the annual basis of statutory off-road notification declarations, paving the way for changes to regulations to be presented to Parliament later this year to facilitate indefinite declarations.

The clause has been subject to targeted consultation with the police, in view of their road traffic enforcement role, and with the wider motor industry. In particular, the Government are liaising with the motor industry to ensure that this regulatory change has no unintended effects on vehicles that have come to the end of their working lives and need to be scrapped and issued with a certificate of destruction.

Let me deal with questions raised by the hon. Member for Newcastle upon Tyne North. The regulations will be amended in December and, as I have mentioned, approximately £3.6 million will be saved over 10 years. Approximately 2 million people a year will be affected.

On fraud or potential fraud, we expect no impact on fraud or evasion of VED. The DVLA has a range of measures to tackle VED evasion, from reminder letters to penalties through to prosecutions and wheel clamping. Currently, we collect 99.3% of VED, which shows that the measures are effective.

The Government are also looking at how this change can be best publicised, to ensure that the vehicle owners affected can take advantage of it. The Government will cease to issue off-road declaration renewal requests and the registered keepers of stored vehicles will not be required to take any action.

The clause will ease regulatory burdens for vehicle owners and unlock efficiency savings for the Government, and I ask that it stand part of the Bill.

Clause 188 - Vehicle licences for disabled people

Sir David Amess (Conservative, Southend West)

With this we will discuss that schedule 35 be the Thirty-fifth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause relates to vehicle licences for disabled people. As I am sure members of the Committee are aware, the disability living allowance is split into three: the high, medium and low rates. Under the new personal independence payment, the payments will be split into just two rates: enhanced and standard.

Under the current legislation, the Vehicle Excise and Registration Act 1994, claimants are exempt from vehicle excise duty only if they are on the higher rate. That suggests that some claimants who previously received a full exemption will now receive only a 50% discount, while some who previously received no exemption will now have to pay only half the rate. In addition, the measure provides for a full vehicle excise duty exemption for those receiving the armed forces independence payment, which came into effect on 8 April this year.

It is true that the changes will bring new help to some people. The Government claim in their policy objective for the measure that their

“aim is to ensure that the tax system provides support for people with serious mobility impairments to lead full, active and independent lives.”

However, although the measure will work for some, large numbers of disabled people in the country will feel cast aside by the Government, with no support to help them to lead

“full, active and independent lives.”

The chief executive of Scope, Richard Hawkes, has said that

“times are tough for everyone but disabled people are being hit harder than most. They face a triple whammy of cuts to their benefits, cuts to local services as local authority budgets get squeezed and an ever increasing cost of living.”

In particular, the 500,000 disabled people who, by the Government’s own assessment, will lose support in the move from DLA to PIP are the very people who will not benefit from the changes in the clause. Even in respect of those who will remain in receipt of support after the move to PIP, it would be helpful if the Minister could clarify how many will stand to gain from this measure.

Will the Minister outline whether any of those affected by the move will see a reduction in support for VED rates, and, if so, how many? In other words, is it possible for people who were on the high rate of DLA to be re-categorised as on the standard rate of PIP, thereby going from a full exemption to only a 50% discount?

The operational impact section of the Government’s impact note for the measure states:

“Introducing the rates discount will require changes to tax systems at a one-off cost of between £5 million and £10 million.”

Will the Minister provide a breakdown of where those costs will fall? That would be helpful for the Committee’s understanding of the impact of the change. Given that the introduction of a full exemption for those receiving the armed forces independence payment was not mentioned in the impact note, will he clarify whether the costs associated with creating the new tax support are included in the £5 million to £10 million range?

Paragraphs 5 and 6 of schedule 35 provide that the full exemption or 50% discount will remain in effect during any period of the recipient’s treatment as an in-patient at a hospital or similar institution. Our understanding is that claimants will cease to receive PIP if their stay in hospital is more than a certain length of time. Will the Minister confirm whether that is the case and, if so, whether that will have any impact on a claimant’s ability to receive either the full exemption or the 50% discount? If it will, what processes will be put in place to claw back the exemption or discount from a pre-paid VED payment? The claimant may have already claimed the exemption or discount and then become ineligible.

Finally, will the Minister give an update on the time scale for the implementation of the PIP and the corresponding time scale for the implementation of this measure? We would assume that they would dovetail, but it would be helpful if the Minister clarified that.

Fiona O'Donnell (Labour, East Lothian)

I would like to add to the questions asked by my hon. Friend the Member for Newcastle upon Tyne North. What discussions has the Minister had with the Minister for Disabled People, the hon. Member for Wirral West (Esther McVey), about the further consultation that she has announced on the mobility component of PIP? There has been such an outcry, and so many concerns have been raised by NGOs dealing with disability issues, that she clearly thinks it is time to go back to the drawing board and look at some of the assessment criteria. Has the Minister had any discussions with her on the impact? Would it not be better for him also to pause and wait for the outcome of the consultation?

Sajid Javid (Conservative, Bromsgrove)

Clause 188 introduces schedule 35, which maintains vehicle excise duty support for working-age people and armed forces veterans who suffer from serious difficulties in getting around. By way of background, successive Governments have recognised that tax support should flow from the award of welfare payments. This maintenance update to vehicle excise duty support flows from the changes the Government are making to welfare payments. In the June 2010 Budget, the Government announced their intention to reform DLA and have consulted on the change over the past two years.

The DLA is a payment that has been made for children and adults of working age who have had to cope with the effects of disabilities. For people who have had to cope with the most serious difficulties in getting around, there has been a higher-rate mobility component to the allowance, which links through to the vehicle excise duty exemption.

For people of working age, the DLA is being replaced by personal independence payments, and welfare claimants’ migration to the payment began on 8 April. Alongside PIP, the Government are introducing the AFIP to support veterans seriously injured as a result of service since 6 April 2005. The clause will ensure that the overall amount of vehicle excise duty support is protected with welfare claimants’ entry into those payments.

The changes made by clause 188 will protect the overall amount of vehicle excise duty support through two routes. First, the principle of tax exemption for those most in need of help is upheld by giving 100% tax exemption to armed forces veterans in receipt of AFIP and people in receipt of enhanced mobility PIP. Secondly, the clause includes the standard mobility PIP recipients by means of a 50% tax rate discount for people who have better, albeit still limited, mobility.

As a result of the clause, by May 2018 up to 223,000 more people than before will receive tax support for the first time. Altogether, up to 1.23 million people will be eligible for tax support by May 2018, of whom 602,000 will be eligible for the 100% exemption. I hope those numbers answer some of the questions that the hon. Member for Newcastle upon Tyne North had about the numbers of people affected.

The hon. Lady specifically asked whether some people will pay more tax. Our assessment for the new welfare benefit will mean that some people who currently enjoy the 100% tax exemption will pay more in vehicle excise duty because they have better mobility. The full tax exemption is focused on the most needy and the most seriously mobility impaired. The 50% tax rate discount is for disabled people who have better, albeit still limited, mobility. It is important to note that, in our assessment, 223,000 more people will receive tax support for the first time. That is important. The measure is targeted to help the most needy people; it also helps more people at the same time.

The hon. Lady asked about the impact of AFIP and whether we had numbers on that. The numbers are included in the numbers that I have mentioned. We have not separated those numbers or broken them down. I will check whether a breakdown is available. If there is, I will be happy to provide that for the hon. Lady.

I was also asked when the new regime would commence. The DWP will start to pilot the new personal independence payment and the new armed forces independence payment from 8 April 2013, and we expect them to be fully implemented by 2018.

Lastly, the hon. Member for East Lothian asked me if we would work with our colleagues in DWP on other changes that are taking place to disability benefits, particularly mobility benefits. Of course, we work very closely with our colleagues in that Department. The particular change under this clause and this schedule that we have discussed is fully accepted by all Departments as the right course of action, and it fits in with the general changes that the Minister with responsibility for disabilities, my hon. Friend the Member for Wirral West (Esther McVey), is making or proposing.

This clause helps to provide support active and independent living for people who have the most severe mobility impairments. It ensures that disabled people who want to work and are able to work have tax support for their means of transport to get to work. I move that the clause stand part of the Bill.

Clause 189 - Repayments of value added tax to health service bodies

Catherine McKinnell (Labour, Newcastle upon Tyne North)

This short technical clause ensures that certain health service bodies created by the Health and Social Care Act 2012 are added to the list of bodies that may claim refunds on VAT if they pay for certain goods and services, in the same way that their predecessor bodies were able to. These new bodies obviously include the new clinical commissioning groups and the three bodies whose status the Act changed from special health authorities to non-departmental public bodies.

We touched on the creation of these new bodies in our discussion of clause 36, which ensures that the same bodies will also be exempt from corporation tax. We could talk, as we did in that discussion, about the views of Labour Members of the Committee on the 2012 Act. However, we have already put those views firmly on the record, so I will not detain the Committee unnecessarily this morning by repeating them, which I am sure you will be relieved to hear, Mr Amess.

However, to complement our discussion of clause 36 and as the explanatory note explains, this clause provides that Government Departments may claim a refund on the VAT if they pay for certain goods and services, to the extent that the Treasury so directs. That is obviously to ensure that the VAT is not an obstacle to contracting out activities to the public and voluntary sectors. However, for the sake of transparency, can the Minister clarify the expected cost to the Exchequer of this particular measure? Also, can he give details of any assessment that has been made of the nature of the activities that these four bodies are expected to contract out that they have not already contracted out?

David Gauke (Conservative, South West Hertfordshire)

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

As we have heard, clause 189 ensures continuity of VAT funding arrangements following the enactment of the Health and Social Care Act 2012, and this is a consequential amendment. Let me briefly provide hon. Members with background information.

Government Departments and a variety of NHS bodies, including primary care trusts and special health authorities, get VAT refunded on certain services. NHS bodies are refunded VAT on certain services purchased for a non-business purpose, such as free health care, if the bodies are named in VAT legislation. However, as a result of the Health and Social Care Act 2012, PCTs were abolished and replaced by the NHS Commissioning Board and clinical commissioning groups. Previously, the NHS Commissioning Board was a special health authority and it has now become a non-departmental public body. The National Institute of Health and Clinical Excellence and the NHS Information Centre were abolished and replaced by two new non-departmental public bodies: the National Institute for Health and Care Excellence, and the Health and Social Care Information Centre. All those changes occurred from April 2013, and mean that the organisations are no longer named under value added tax legislation, so they cannot be refunded VAT on certain services.

Clause 189 ensures continuity of VAT funding arrangements, following the enactment of the Health and Social Care Act 2012. The changes under the clause will apply to four bodies: the NHS Commissioning Board; clinical commissioning groups; the National Institute for Health and Care Excellence, and the Health and Social Care Information Centre. Those changes will ensure that what would otherwise be irrecoverable VAT does not dissuade NHS bodies from contracting out activities, if that would be more efficient.

I wish also to highlight the fact that the 2013 Budget announced further changes to the legislation. The Government plan to give refunds of VAT to two other NHS organisations: Health Education England and the Health Research Authority, when they become non-departmental public bodies in 2014. The hon. Member for Newcastle upon Tyne North asked whether the new bodies would be carrying out the same activities as those they are replacing. I can confirm that that is the case. She also asked about the cost of the measures. It is a matter of continuing with the same practice, so the measures are not expected to have an Exchequer impact. In conclusion, the clause is one of several consequential changes to tax legislation to reflect the reforms to the NHS and provide continuity of VAT treatment to certain NHS bodies.

I take this opportunity to say that, in Committee on Thursday afternoon, in response to a question from the hon. Lady about the number of taxpayers who might be subject to the capital gains tax charge on disposals of United Kingdom residential property worth more than £2 million held by companies and some other non-natural persons, I misspoke by saying the estimate was that fewer than 20 non-natural persons might pay the CGT charge each year, when I should have said that the estimate was fewer than 200. However, I hope that it remains clear that an extremely small proportion of companies other than non-natural persons, whether UK or non-resident, will pay the new charge each year. Having made that correction and explained the purpose of the clause, I hope that it will stand part of the Bill.

Clause 190 - Valuation of certain supplies of fuel

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss that schedule 36 be the Thirty-sixth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause updates United Kingdom VAT law on how the use of business road fuel for private journeys should be taxed, which is obviously an important issue for many of our constituents who use their private vehicles for business and personal use. It brings two concessions into law, and it is also an attempt to bring United Kingdom law within its European vires. The Government have made it clear that there are four objectives: bring the two concessions into law, amend the current legislation to make it compatible with EU law, streamline how the law is set out to aid the understanding of small businesses and simplify how the valuation tables are updated over time.

In relation to the final stated aim of the Government, the measure proposes to take the annual valorisation of the table set out under section 57 of the Value Added Tax Act 1994 out of the Budget process. Instead, HMRC will be required to update the table outside the Budget process and to a formula set out under a Treasury Order approved by Parliament. Will the Minister provide a little additional detail on that point? Will he also outline the consultation process to which that formula has been subjected and that to which it will be subjected in case of any future changes? How do we ensure that the measure is accountable to Parliament in how it is determined?

The Government’s policy objective for the clause states that, alongside any future amendments to the road fuel scale charges, they will also publish relevant guidance, achieving reductions in burdens on small businesses and reduced costs for HMRC and the Treasury. Will the Minister also provide extra detail on that point? For example, what savings are expected for small businesses, HMRC and the Treasury? What process will be put in place to ensure that the guidance produced is fit for purpose and helps to achieve those aims?

David Gauke (Conservative, South West Hertfordshire)

The Government announced at Budget 2012 that we would legislate to update and streamline VAT road fuel scale charges and to bring two existing VAT extra-statutory concessions into law as part of the Finance Bill 2013. Clause 190 and schedule 36 do that. The measure will clarify the options businesses have for accounting for VAT on road fuel used for private journeys, take the revalorisation of scale charges out of the Budget process and allow HMRC to publish—in one place—the scale charges with legal force alongside guidance for their use.

Let me provide some background to the clause and the schedule. Where a taxpayer uses business goods for private purposes, that is deemed to be supply-for-VAT purposes and VAT must be accounted for. That includes where a business’s road fuel is used in making private journeys. As calculating the value of such fuel is often onerous, the UK obtained a derogation that enables taxpayers to value such deemed supplies on a simplified flat-rate basis—the fuel scale charges. The derogation requires the scheme to be optional.

Current UK law makes the fuel scale charge scheme compulsory, but two extra-statutory concessions allow taxpayers some flexibility, consistent with the UK’s derogation. As we can no longer retain concessions, the law is being amended to allow for the scale charges to be optional within a proper legal, framework.

The clause and the schedule mean that taxpayers will retain three basic options for accounting for private use of road fuel and so will experience no change. Those are, first, not to claim VAT on supplies of fuel received; secondly, to claim VAT and account for VAT on the basis of the fuel scale charges; or, thirdly, to claim VAT and keep detailed mileage records demonstrating how the fuel is used.

Where employers charge employees for road fuel used for private purposes at less than market value, those supplies will be valued at their market value, rather than at the amount paid. That will prevent tax avoidance whereby employers make an artificially low charge for the fuel used.

As we announced in the autumn, to prevent forestalling, any supplies made between the autumn announcement and the Finance Bill coming into force will be valued by the anti-avoidance rule, but only to the extent that the fuel is used after Royal Assent to the Act. The new law requires the Treasury to set out in an order a base table of fuel scale charges and the method HMRC must use to revalorise those charges each year to reflect changes in road fuel prices.

The first such order will be laid in the autumn and the table set out in the order will replace the table in the 1994 Act, with effect from next February. After that, HMRC will revalorise the figures annually, and update and publish that table, unless a new order is approved by Parliament. To allow for new fuels and technologies becoming more popular, there is a power to change the definition of road fuel by affirmative order. That will allow users of any new fuels and technologies to benefit from the optional flat-rate scheme where appropriate. The definition in the anti-avoidance rule will similarly be allowed to be varied.

In response to questions asked by the hon. Member for Newcastle upon Tyne North, perhaps I should underline the fact that HMRC will have no discretion over how the revalorisation is done. The revalorisation will be able to reflect only the changes in pump prices each year and the prospective changes in the rate of duty. How revalorisation must be done will be set out in an order approved by Parliament after a debate, and that cannot be changed without a further parliamentary debate.

On the compliance cost to small business in understanding these new rules, it is worth pointing out that there will still be a table of charges set by reference to CO2 emissions that small businesses can simply look up and use to declare VAT on private use of fuel. No additional action is needed by small businesses to declare their tax accurately and with confidence. The changes will have no Exchequer impact and there is not expected to be either a positive or a negative impact on small businesses.

Guidance will be drafted and exposed to interested parties in time for the new statutory instrument coming into force. HMRC is committed to ensuring that the matter is simple for business to understand and apply.

The clause and the schedule ensure that UK law is consistent with the requirements of the European VAT directive and the UK’s derogation. They simplify the annual revalorisation of the scale charges, bring two concessions into law and enable the Government to ensure that rules governing road fuel are simple for small businesses to understand and apply.

Clause 191 - Reduced rate for energy-saving materials

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause relates to a reduced rate of VAT for energy-saving materials. The UK applies a reduced rate of 5% VAT to the supply and installation of certain energy-saving materials. Reduced VAT for installation of energy-saving materials in buildings solely used for a relevant charitable purpose will be withdrawn by the clause. That follows legal proceedings initiated by the European Commission against the UK on the basis that the reduced rate is not allowed under EU law.

The European Commission, for three reasons, took the view that the UK was unlawfully applying the reduced rate. The Government have stated that they disagree with the Commission on the first two points, but accept the final point—namely, that charitable non-business buildings and village halls cannot properly be described as housing, which was the requirement under EU legislation.

The tax information and impact note for the clause states that the Government have informed the Commission of

“its intention to withdraw this reduced rate from charitable buildings as part of Finance Bill 2013… The subsequent publication of the EC’s Reasoned Opinion indicates that it intends to proceed with the infraction against the UK in any event.”

I am sure that that will get many Government Back Benchers swivelling their eyes. The note continued:

“The Government will continue to defend the remainder of the reduced rate.”

Will the Minister update the Committee on what that defence will be and where we are with it? I appreciate the limitations on sharing legal advice to the Government, but if he updated us as much as possible on the legal position that would be helpful—

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 191 - Reduced rate for energy-saving materials

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I will pick up immediately where I left off before lunch. The Government further state in their “Summary of impacts”:

“Only a small number of businesses, some of which are likely to be small businesses, are estimated to routinely work on the installation of ESM; these are expected to incur small costs from familiarisation with the new guidance and additional bookkeeping. A further 100,000 businesses who provide construction services may incur very minimal familiarisation costs.”

If the Minister were to clarify what those small costs on average will be, that would help put the impact statement in context for the Committee. I ask because the charitable sector is concerned that this measure will in reality have more than a small impact on them, especially when taken in conjunction with other factors that are impacting on the sector. Many in the sector have argued that the VAT system currently poses one of the biggest challenges for the UK charity sector.

As many Committee members know, VAT is underpinned by the premise that the cost of a service or product is ultimately borne by the final consumer, yet charities operate outside that underlying principle, as they rarely charge for the goods or services that they provide. The result is that charities face an unlevel playing field in many respects when it comes to VAT. The irrecoverable VAT is estimated to cost the sector £500 million a year and the costs of any VAT rises are borne by the charities themselves, which further exacerbates the problem.

The VAT reliefs available to charities are therefore extremely important in going some way, in certain areas, towards correcting what many believe to be an unjust structural inconsistency. Zero and reduced rates are extremely valuable to charities, allowing them to undertake activities that are valuable to society and that would otherwise not be affordable. Many in the charitable sector are increasingly concerned about the gradual chipping away at many of those reduced rates, such as the VAT on supplies of research between eligible bodies and VAT on listed buildings. The removal proposed in this measure adds to that list.

Given that these are already difficult times for the charitable sector, will the Minister tell us what assessment has been made of the cumulative impact on charities of the removal of various reduced rates, including this one? What commitment can he give the charitable sector that the Government will fight to retain reduced rates for charities and do whatever they can to maintain Government support for the sector, given the Prime Minister’s very open support for the charitable sector and his stated belief in the big society, which obviously requires that level of commitment from the Government in order to be sustained in these difficult economic times?

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to welcome you back to the Chair after lunch, Mr Amess. Clause 191 removes the reduced rate of 5% VAT applied to the installation, including supply, of energy-saving materials in buildings used solely for a “relevant charitable purpose”. This change follows legal action taken by the European Commission. The reduced rate for the installation of such materials in residential accommodation is left unchanged.

Let me briefly provide hon. Members with some background to the clause. The UK currently applies a reduced rate of VAT to the installation, including supply, of energy-saving materials in buildings used solely for a relevant charitable purpose and in residential accommodation. The reduced rate of 5% VAT applies only where the installation of the materials is carried out in isolation or together with other works necessary to aid that installation—for example, cutting a loft hatch in a ceiling to install loft insulation. Any energy-saving materials installed as part of wider works—for example, a new extension—are already subject to VAT at 20%.

The European Commission considers that the reduced rate has no legal basis, and it has taken legal action against the UK. The Government do not agree with all the arguments put forward by the Commission, but we have accepted that in applying the reduced rate for relevant charitable buildings we are applying the provisions too widely. Consequently, at Budget 2012, we announced our intention to withdraw the reduced rate from relevant charitable buildings as part of the 2013 Finance Bill. We will, however, continue to defend the reduced rate for the installation of energy-saving materials in residential accommodation. The Commission has now referred the case to the European Court of Justice.

The clause removes the reduced rate of 5% VAT applied to the installation, including supply, of energy-saving materials in buildings used solely for a relevant charitable purpose. Only charities that use buildings for a non-business charitable purpose or as a village hall or similar will be affected by the change, which means that the installation of energy-saving materials in such buildings will become liable to VAT at the standard rate of 20%, whereas in the past they might have been eligible for the reduced rate of 5%.

The change will not affect projects in those buildings where energy-saving materials are installed as part of wider building works, such as an extension, because they are already subject to the standard rate of VAT. Nor will it affect charities that use their buildings for business purposes, if those are not relevant charitable buildings. The reduced rate for the use of energy-saving materials in residential accommodation such as dwellings, old people’s homes, children’s homes, hospices and so on is not affected by the amendment.

The listed places of worship grant scheme may cover the cost of VAT incurred on repairs and alterations to listed places of worship, including the installation of energy-saving materials. Thus, the overall financial burden on listed places of worship should not be increased by the measure.

Of the issues raised by the hon. Lady, one mentioned before lunch was the state of play with regard to defending the UK’s position in Europe on energy-saving materials. As she rightly points out, I cannot or will not disclose legal advice, but I can say that last summer the UK received from the European Commission the reasoned opinion that the provision for the reduced rate on energy-saving materials was ultra vires to EU law. We responded in August last year and heard nothing until February this year, when the Commission advised that it was proceeding with the infraction despite the UK withdrawing the reduced rate from relevant charitable buildings, and that it had referred the matter to the European Court of Justice. We have yet to hear from the ECJ, but the next step will be a written submission to the Court, when so requested.

On the impact on charities of the specific measure, not all charities will be affected; only those charities that use their buildings solely for a non-business purpose, or as a village hall or similar, will be affected. The only projects affected will be those where works are supplied in isolation or with other works that aid that installation, such as cutting a loft hatch in a ceiling to install loft insulation. As a consequence of the change, therefore, the 20% rate would apply. Energy-saving materials installed as part of wider works to the buildings, such as a new extension, are already subject to the 20% rate of VAT.

Projects to install energy-saving materials in residential accommodation will not be affected by the clause, so there will be no impact for charities that create residential accommodation, such as old people’s homes, children’s homes or hospices. Furthermore, affected bodies will have had 16 months between announcement and implementation of the withdrawal to prepare for the change.

The hon. Lady sought to press me on assessment of the impact on charities of the removal of the reduced rate. Overall, it is estimated that the impact of the measure will be negligible, which for these purposes means less than £5 million. Details were set out in the tax information impact note published in the 2012 autumn statement. It is worth pointing out that the cost to businesses that install energy-saving materials will be limited to the costs associated with the time taken to familiarise themselves with amended legislation. That is the extent of it.

The Government are committed to supporting the charitable sector and the hon. Lady will be aware of the size of support through the gift aid system, for example, which is considerable. We will continue to provide support in that way and others.

The Government have accepted that we must withdraw the reduced rate of VAT that currently applies to the supply and installation of energy-saving materials in relevant charity buildings. The clause gives effect to that decision, and I hope that it will stand part of the Bill.

Clause 192 - Pre-completion transactions: existing cases

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 60, in clause 192, page 113, line 26, after ‘rights)’ insert—

‘(a) has effect subject to the amendment in subsection (1A) in relation to agreements for the grant or assignment of an option that are entered into during the period beginning with 21 March 2012 and ending immediately before the day on which this Act is passed, and’.

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss the following:

Government amendments 61 to 64.

Clause stand part.

David Gauke (Conservative, South West Hertfordshire)

Clause 192 amends the stamp duty land tax rules on the transfer of rights to put beyond doubt the fact that particular stamp duty land tax avoidance schemes do not work. These avoidance schemes are the latest in a number of schemes that attempt to avoid stamp duty land tax on the purchase of property. In the 2012 Budget, the Chancellor made it clear that he expected people to pay stamp duty land tax when they purchased property, and warned that he would not hesitate to use retrospective legislation to close down future schemes. These changes will therefore apply retrospectively from 21 March 2012.

I will provide some background to the clause. Stamp duty land tax contains provisions for a transfer of rights. This is when someone enters into a contract to purchase land but then, before completing the purchase, agrees either to transfer their rights under that contract to a third party or to sell the land on to a third party. These provisions currently result in only one charge to stamp duty land tax, which is on the ultimate purchaser, and the transaction involving the original purchaser is disregarded. The single charge reflects the economic reality of the transaction as the original purchaser never takes possession of the land.

The transfer of rights rules have frequently featured in stamp duty land tax avoidance schemes and legislation was introduced in the Finance Acts 2011 and 2012 to close down two particular schemes. In the 2012 Budget, the Chancellor also announced a review of the transfer of rights rules to make them robust against attempted avoidance, and warned that he would not hesitate to use retrospective legislation to close down future stamp duty land tax avoidance schemes.

Steven Baker (Conservative, Wycombe)

My hon. Friend knows that on Thursday I will be dealing with some retrospection issues in my proposed new clause 1. Will he explain his thinking on why retrospection specifically is applicable and necessary in this circumstance?

David Gauke (Conservative, South West Hertfordshire)

We believe that there are circumstances where the Government must be able to take effective action to stop the aggressive marketing of tax avoidance schemes. That is only fair to the vast majority of taxpayers who comply with the letter and the spirit of the law. However, we have made it clear that retrospection should be wholly exceptional, but that when particular circumstances arise and it is necessary to take firm action we are prepared to do so.

In those circumstances, we have something that is clearly contrary to Parliament’s intention. The Chancellor has given a clear warning that we are prepared to use retrospective legislation in that area, and I believe that our response, in the circumstances, is wholly proportionate. Anyone who participated in the arrangements and was advised on them should be aware that the arrangements were clearly contrary to Parliament’s intention. For the vast majority of people who pay stamp duty land tax, where a transaction involves the sale of a property it is absolutely right that we address the behaviour involved, as we do in the clause.

Nigel Mills (Conservative, Amber Valley)

The Chancellor gave a clear warning that the Government would seek to tackle such things. It would be interesting if the Minister set out for the Committee whether, if another such scheme is used under different rules or the replacement rules, the Government will consider bringing in a retrospective rule to stop that or rely on the anti-tax abuse rule that will come into force on Royal Assent as as effective a block as is needed in those situations?

David Gauke (Conservative, South West Hertfordshire)

As I said a moment ago, in Budget 2012 the Chancellor made it clear that he was prepared to use retrospective legislation to close down future stamp duty land tax avoidance schemes, and that warning remains. I do not want there to be any confusion about that. The statement still stands. The behaviour that we address in the clause falls clearly within the scope of my right hon. Friend the Chancellor’s warning in 2012.

Despite that warning, there has been an increase in the use of two schemes in particular. They are schemes that seek to delay the completion of the transfer of rights contract for a number of years, leaving the original purchaser in possession of the property without their having paid any stamp duty land tax. Although Her Majesty’s Revenue and Customs does not believe that the schemes produce the result claimed by their promoters, the schemes have continued to be marketed and used. It was appropriate, therefore, to act on the Chancellor’s warning last year and to introduce retrospective legislation to close the schemes down, and we might be prepared to do the same in the future if faced with similar circumstances. My hon. Friend the Member for Amber Valley is right that the general anti-abuse rule might be helpful in addressing the matter, but we have made it clear that that does not mean that we will refrain from taking other actions to deal with aggressive avoidance. The changes made by the clause will ensure that stamp duty land tax is paid by the true purchaser of the land, which in these schemes is the original purchaser.

I turn now to Government amendments 60 to 64. The clause makes it clear that two particular avoidance schemes that abuse the SDLT transfer of rights rules are ineffective. Since the announcement at Budget 2013 that legislation would be introduced to put it beyond doubt that the two schemes did not work, HMRC has identified a third scheme that abuses the transfer of rights rules.

That scheme has been used since the Chancellor’s announcement last year, and the Government amendments therefore address that matter. The scheme is a variation on the one, closed down at Budget 2012, that involved the original purchaser granting an option to a third party, entitling them to purchase the land at a future date. All the later scheme does is to insert a further step into the original arrangements, which it is claimed gets around the 2012 fix. It is obvious that the promoters and users of the scheme took no heed of the Chancellor’s warning, and it is only fair that action is taken now to prevent them from benefiting from the scheme. The Government amendments therefore include that scheme in the legislation, and the provision will be applied retrospectively from 21 March 2012.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister has addressed the majority of the points I would have put to him, save for one clarification. It might be helpful for him to clarify that at this stage.

The protocol on unscheduled announcements of changes in tax law set out three very particular sets of circumstances where a retrospective application and change to the tax law should be made, one being a significant risk to the Exchequer. However, the Government’s technical note does not make it clear what those risks are and what the assessment of them is. Therefore, it is not entirely clear whether the protocol applies in this case. That echoes the concerns raised by the hon. Member for Wycombe. If HMRC does not believe that the schemes produce the tax result claimed, will the Minister confirm that there is without doubt a significant risk to the Exchequer in this case?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that question. If there is an opportunity to deal with all the hon. Lady’s questions in my opening speech, that might help us to progress. Our argument is that this measure is consistent with the Government’s protocol on unscheduled announcements of changes to law, including the use of retrospective legislation. It falls within the class of being a wholly exceptional case. The reason is that there is a history of abuse in this area of the legislation. Indeed, we have already made that clear. The policy intent has been made clear. The Chancellor gave a clear warning at Budget 2012 that he would not hesitate to use retrospective legislation if abuse of the SDLT rules continued.

It is also worth pointing out that HMRC believes that the particular schemes do not work, so ultimately HMRC would win in litigation; but that would take a considerable length of time. In those circumstances, it would be better to address the matter now by making the situation clear and putting it beyond doubt. As far as the tax at risk from the transfer of rights schemes is concerned, HMRC estimates that it is around £160 million over the next five years. Even though HMRC is confident that it would win any case, that is not an insignificant amount. It is an area where there has been repeated abuse and there have been repeated warnings that the Government will not tolerate that behaviour. In those circumstances, we believe that action in the case is justified, including retrospective action.

As I have made clear many times before and I suspect will again on Thursday, retrospective legislation should be used with great care. I believe we have acted with great care in these circumstances.

Steven Baker (Conservative, Wycombe)

I did not wish to interrupt my hon. Friend in mid-flow, but I would like to take him back to where he said the schemes do not work. Will he be clear? Does he mean that they are unlawful, or that they are lawful but HMRC does not approve of them because they are clearly not in line with Parliament’s intent? Are they lawful or not?

David Gauke (Conservative, South West Hertfordshire)

The word “lawful” can lead to a degree of ambiguity. When people say it is not lawful, is it criminal? There is no criminal offence that one can see here. Is it effective under the law that currently stands for the taxpayer not to over-tax? Does it do what the promoter claims? Does it work in so far as the individual does not have to pay stamp duty land tax? The view of HMRC is that it is not effective; it does not do that. But clearly, if we can pass this legislation it avoids all questions of doubt and clarifies the position. We can deal with a form of avoidance that has rightly caused considerable public disquiet. It is not fair that, when the vast majority of our constituents pay stamp duty land tax when they acquire a property, there are some individuals—I was going to say that they are well advised, but they are least advised—who attempt to get round the rules. That is not right, so I commend the clause and my amendments to the Committee.

Clause 193 - Pre-completion transactions

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss that schedule 37 be the Thirty-seventh schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As discussed under the previous clause, stamp duty land tax schemes have sought to exploit uncertainties in current legislation. We therefore welcome the removal of such uncertainties through amending and supplementing the existing legislation or through drafting a replacement set of rules. However, concerns have been expressed by the industry regarding the drafting of the clauses, given that, for example, new schedule 2A of the Finance Act 2003 will have 104 sub-paragraphs in place of the current nine subsections of section 45 of that Act.

The Chartered Institute of Taxation said:

“The draft clauses have been formulated as a complex set of prescriptive rules. Legislation of this nature tends to create opportunities for structuring transactions in a way that is not intended thereby defeating its object of preventing abuse. We do not think this is the right approach to tightening these rules.”

The institute also shares the concern of the Stamp Taxes Practitioners Group that the new legislation is likely

“to severely hamper genuine commercial and residential property transactions because it is not readily intelligible to conveyancers and property lawyers who will need to apply it in practice. The drafting is tortuous, subsales (the most common type of transaction covered by the draft clauses) are variously defined as ‘pre-completion transactions’, ‘free-standing transfers’ and ‘qualifying subsales’.

Practitioners do not recognise the estimate of numbers of transactions that are likely to be affected by these provisions. There appears to be a significant under-estimate of the likely number of such transactions.”

HMRC has promised clear guidance upon which taxpayers and their advisers will be able to rely. However, I am sure the Minister will agree that, particularly where guidance attempts to soften the harsher effects of prescriptive legislation, there is a fine line between interpretation and concession, which goes beyond HMRC’s powers. If guidance crosses the line into concession, the ability to rely on that guidance is thrown into doubt. Will the Minister outline what process will be undertaken to ensure that the guidance is clear and fit for purpose and will not fall victim to such pressures?

It is perhaps inevitable that the guidance will not be able to cover every possible situation, but a number of situations have been highlighted because there is concern that the guidance will not clarify them and that they will remain distinctly unclear. If the Minister is aware of the Chartered Institute of Taxation’s concerns about the technical application of the new legislation and the guidelines, it would be helpful if he could provide reassurance that they have been considered by HMRC and the Government in drafting the provisions.

The institute has raised a number of issues, which I will not go into for the sake of brevity. However, will the Minister comment on the variety of concerns that have been expressed about the drafting of the legislation and the lack of clarity? The new legislation could facilitate additional avoidance rather than deliver the intended aim, which, as the Minister says, is that everyone pays stamp duty land tax fairly and equitably.

David Gauke (Conservative, South West Hertfordshire)

Clause 193 will reform an area of the stamp duty land tax code that has been the subject of extensive attempted avoidance. It will apply to transactions that are currently known as transfer of rights, which will in future be called pre-completion transactions. The new rules are designed to replicate the tax outcome of the current rules for commercial transactions, but to be robust against attempted abuse.

The transfer of rights rules cover situations in which someone enters into a contract to acquire land and then enters into a further agreement before completing the purchase—either to sell on the land, or to sell their rights to the land. The rules determine how much tax the final purchaser should pay and allow the initial purchaser to disregard the acquisition if certain conditions are met.

Over a number of years, there have been repeated attempts to devise SDLT avoidance schemes using the transfer of rights rules. Such attempted abuse has continued in the face of several small legislative changes to put beyond doubt that such schemes do not work. At Budget 2012, the Chancellor therefore made it clear that continued attempted abuse would not be tolerated. Among other things, he announced that HMRC would consult on reforming the transfer of rights rules, and the clause and the schedule are the outcome of that consultation.

Clause 193 will introduce a new set of rules for pre-completion transactions, replacing and superseding the current rules for the transfer of rights. Although the new rules are similar in scope to the old ones, they contain three major differences. First, the initial purchaser will no longer be able simply to disregard the initial transaction; instead, the initial purchaser will have to claim relief in a normal land transaction return. The relief will be available only for pre-completion transactions that are sub-sales or assignments.

Secondly, relief for the initial purchaser will be subject to an avoidance purpose test. Relief will not be available when the pre-completion transaction forms part of arrangements for avoiding tax. Thirdly, the ultimate purchaser will be subject to a minimum consideration rule if they are connected with, or not acting at arm’s length from, the initial purchaser, which will ensure that the ultimate purchaser is charged an appropriate amount of tax.

The hon. Member for Newcastle upon Tyne North raised concerns about the length and complexity of the legislation. It would be fair to say that there can sometimes be a tension in tax law between brevity and clarity. We have sought to make the legislation as clear as possible, although I accept that that has been at the expense of brevity. Part of the problem is that the current legislation applies the same rules to a number of different types of transaction. That makes the legislation succinct, but its brevity has led to the perceived lack of clarity that I mentioned.

In the public consultation on the revision of the rules, there were calls for the types of transaction to be differentiated and the tax treatment to be made clearer. We therefore decided to unpack the different transactional processes and to show the tax impact at each stage. The unpacking of the creation of deemed transactions added to the complexity, which had previously been avoided by a complete disregard of the first transaction. The level of attempted abuse meant that the disregard could no longer be retained. The legislation became more complex to ensure that all intermediate transactions were catered for when they had previously been disregarded.

The hon. Lady also asked about guidance. HMRC has issued draft guidance that includes examples of how a range of scenarios should be treated. That guidance covers common and straightforward situations, as well as some more complex ones. HMRC has invited comments on how the guidance can be extended and improved in the run-up to the new rules coming into effect, and that guidance will ultimately be included in HMRC’s SDLT manual. I hope that that provides hon. Members with all the information required.

The measure forms part of the Government’s actions to make sure that purchasers of land pay their fair share of tax. It is designed to make it clear that this aspect of the SDLT rules cannot be abused to avoid tax.

Clause 194 - Relief from higher rate

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss that schedule 38 be the Thirty-eighth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause and schedule provide for extended reliefs from the 15% STLD higher rate that was introduced in the Finance Act 2012. Among other things, the new reliefs extend the relief for property development trades and provide additional reliefs for a wider range of commercial uses. All the reliefs are subject to clawback if any of the stated conditions are not met during a specified period.

Some in the industry have expressed concern that the reliefs for which the Bill provides will be introduced with effect from Royal Assent, whereas the higher rate of SDLT has applied since 21 March 2012. The delay in implementing the reliefs means that genuine businesses will have every reason to defer transactions until after Royal Assent, which would have a distorting effect on economic behaviour. Although those in the industry recognise an understandable wish to ensure that the scope and drafting of the reliefs are correctly framed, they are struggling to understand the practical bars to aligning the availability of the reliefs with the higher rate charge. Will the Minister clarify for the Committee the reasons behind the delay in implementing the reliefs?

There is also one commercial situation that does not appear to be covered by the proposed reliefs: if an existing business such as a hotel, school or care home acquires a high-value dwelling in order to convert it and run it as part of its trade, rather than reselling it. The extended relief for redeveloping property appears to preclude such relief because of the references to resale, so will the Minister confirm the position with regard to that situation?

David Gauke (Conservative, South West Hertfordshire)

The clause and schedule introduce a series of reliefs to the 15% rate of stamp duty land tax on residential property valued at over £2 million purchased by certain non-natural persons. As I described during our debate on the annual tax on enveloped dwellings, that term encompasses companies, partnerships that include a company, and collective investment schemes. The reliefs mirror as far as possible those being introduced for the annual tax on enveloped dwellings and for the extension to the capital gains tax regime.

The 15% rate of stamp duty land tax was introduced in 2012 as part of a package of measures aimed at tackling stamp duty land tax avoidance through the use of corporate enveloping. Under that process, a property is placed into a vehicle, often as the only asset of a company. The property can then effectively be sold by transferring the shares within that company and that transaction will not be subject to stamp duty land tax. We discussed the rationale for the measures during our consideration of the Finance Act 2012 and again during the debate on the annual tax on enveloped dwellings and the extension to the capital gains tax regime, so I do not intend to rehearse all the arguments now.

Clause 194 introduces schedule 38, which contains the reliefs. Paragraph 2 replaces the existing relief for property developers with reliefs for businesses of letting, trading in or redeveloping properties, trades involving making a dwelling available to the public, financial institutions acquiring dwellings in the course of lending, dwellings for occupation by certain employees or partners, and farmhouses. I do not intend to discuss each relief in detail as they echo the arrangements that we considered at some length for the annual tax on enveloped dwellings.

There is, however, one important variation. For each relief, the schedule inserts a new measure that provides for a three-year period during which, if conditions change so that the relief would have no longer applied at the point of purchase, the relief is withdrawn and the tax becomes payable, which is sometimes called the clawback period. This important feature is designed to protect against avoidance whereby temporary arrangements are deliberately made to avoid the 15% rate. The three-year clawback rule is a feature of other reliefs in stamp duty land tax, in particular group relief and charities relief, and the reliefs will take effect from Royal Assent.

The hon. Member for Newcastle upon Tyne North asked why the 15% reliefs are not being introduced until Royal Assent. The annual tax on enveloped dwellings has reliefs that are in effect from 1 April, which was carefully considered. The ATED will not be payable until after Royal Assent, so any changes that might have been necessary to the reliefs could be communicated and assimilated prior to a return being due, but the 15% rate is a tax on a transaction whereby tax must be paid within 30 days of the transaction. The Finance Bill becomes law when it receives Royal Assent. Until then, it is subject to change through the parliamentary process, so changes to the proposed reliefs during that time could cause difficulties for transactions in progress. Allowing the reliefs to take effect earlier than Royal Assent would cause a degree of uncertainty for taxpayers for that reason. Royal Assent is only a limited time away—I hope—so it would make little sense to change the start date at this point. Given the period of time concerned and the number of properties for which transactions may be delayed, we believe that the disadvantages outweigh the advantages.

The hon. Lady also asked why there is no relief from the 15% rate for businesses that wish to purchase a residential property and convert it to non-residential for use in their trade, such as a care home. It is a general feature of the SDLT rules that there is a different rate for property that is residential or non-residential at the time of purchase. The rules are even-handed at present in that although a higher rate will apply to residential property for conversion, a lower rate applies to non-residential property that is acquired for conversion to residential. Additionally, such a relief could open up avoidance opportunities with companies claiming non-residential intentions to take advantage of the lower rate, but then not following through with the conversion. Although we could apply a clawback provision, we could still have anomalous situations in which the conversion could not proceed within the relevant time, so the rule might not solve all potential problems. It might be difficult to determine how much time to allow for the conversion to take place as well as for other operational complexities, such as knowing whether the property will be or is being used for non-residential purposes.

Clause 195 - Leases

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss the following:

Government amendments 103 to 106.

That schedule 39 be the Thirty-ninth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 195 and schedule 39 simplify the stamp duty land tax rules that apply to certain lease transactions. Approximately 22,000 taxpayers are expected to benefit from the changes, which will reduce compliance costs by up to £150 per business.

In most cases when a person acquires land or property, stamp duty land tax is paid only once. Certain transactions involving leases can require the purchaser to make further notifications to HMRC, for example when the lease is extended or there is an abnormal increase in the rent. Some of the provisions are complex and onerous for the taxpayer, who may not be aware of his or her ongoing liability. HMRC has been working with its stakeholder group for some time to identify areas of legislation that would benefit from simplification. Three areas under provisions on leases were identified as priorities for such simplification, so we have taken action.

The clause introduces schedule 39, which will abolish the rules on abnormal rent increases, simplify the reporting requirements when a lease continues after the expiry of its fixed term, and simplify the reporting requirements when an agreement for a lease is substantially performed before the actual lease is granted. As I have said, those three areas of the provisions on leases were identified by the stakeholder group as priorities for simplification. HMRC has continued to consult interested parties throughout the process to ensure that the measures give the desired result.

As I said, the clause and schedule are intended to simplify the reporting requirements for certain lease transactions, including when a lease continues after the expiry of its fixed term. However, in some circumstances, the interaction of such changes with another provision under existing legislation would result in the taxpayer being required to subject a return under both provisions for the same period. The potential interaction of the two provisions was not recognised during the consultation period prior to the drafting of the Bill. It is not intended that two returns should be required; indeed, that would go against the objectives of the changes made under schedule 39. Government amendments 103 to 106 will therefore ensure that only one return is required in such circumstances.

For those affected, the changes will streamline the reporting requirements and reduce the administrative costs for business. They support the Government’s objective of simplifying the tax system, so I hope that the Committee will agree to amendments 103 to 106, the clause and the schedule.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Government have stated that their intention behind the abnormal rent increase regime is to prevent the parties from at least agreeing to a low or minimal rent for the first five years with an abnormal increase in year six, thereby reducing the SDLT charge over the long term. However, many in the industry consider that the rules are highly unlikely to counter abuse because, commercially, a landlord would not forgo the rent in the first five years of a lease to provide an SDLT advantage for a tenant, especially as the direct tax rules would mean that the landlord suffered tax on the rents forgone.

In their impact note for the measure, the Government state that 9,000 businesses a year will benefit from the reduction in administrative form-filling. It would be useful to know how HMRC has arrived at that figure and what the breakdown is of the number of businesses that will benefit from the change to leases held over, compared with the number of businesses that will benefit from the changes to agreements for leases.

HMRC also estimates that 13,000 businesses will benefit from the change by not having to carry out the complex calculations needed to determine whether their rent increase is abnormal. Again, it would be helpful to understand the basis of that estimate. As the provisions are being repealed, what assurance can the Minister give that the avoidance that was originally targeted by these measures no longer presents a problem or risk for HMRC?

David Gauke (Conservative, South West Hertfordshire)

If I may, I shall deal with the last question first, which was whether, as these provisions were brought in to deal with avoidance, removing them runs the risk of further avoidance. When stamp duty land tax was introduced in 2003 there was a perceived risk that rent payable under a lease could be structured to avoid the tax. The normal rent increase rules were introduced in 2004 to address that risk. Experience over the years that the tax has been in operation has shown that the risk has not materialised: leases are not structured to avoid stamp duty land tax in such a way. It was therefore right to abolish the rules, although HMRC will keep this area of tax under review to ensure that no new avoidance opportunities emerge. It should be pretty clear to the Committee that the Government’s determination to deal with stamp duty land tax avoidance is strong. We will take action where necessary. In light of the experience that HMRC has had over eight or nine years, it was felt that there was an opportunity here to make a simplification.

The hon. Lady also asked me to break down some of the estimates of entities that will benefit from these changes and the value of that benefit. We do not have any numbers that further break down the benefits and the beneficiaries beyond what has been published. I know she has read the tax information and impact note, and I do not have further numbers that can break that down more precisely. I hope that she will appreciate that this is a measure that, without increasing avoidance risk, will help to benefit a number of businesses and reduce the regulatory burden where we can.

Schedule 39 - Stamp duty land tax on leases

Clause 196 - Standard rate of landfill tax

Catherine McKinnell (Labour, Newcastle upon Tyne North)

This is another short, technical clause. It amends the Finance Act 1996 to increase the standard rate of landfill tax for disposable waste made or treated as made on or after 1 April 2014. In the June 2010 Budget the Government announced that the standard rate of landfill tax would rise by £8 per tonne on 1 April each year up to and including 2014. The clause therefore provides for that rise to the standard rate of landfill tax from £72 to £80. The Government also announced a floor under the standard rate of landfill tax so that it would not fall below £80 per tonne from 2014-15 to 2019-20. Will the Minister say whether the Government will reduce further annual rises in the standard rate of landfill tax after 2014, or will it remain at £80? The Government announced at Budget 2013 that the lower rate of landfill tax for less polluting qualifying waste, currently £2.50 per tonne, will remain frozen in 2014-15. Will the Minister tell us what impact assessments have been carried out on the freeze? Is he also able to give us insight into the Government’s plans for the lower rate of landfill tax beyond 2014-15? That would be helpful to the Committee.

John Pugh (Liberal Democrat, Southport)

I have spent an unusual amount of time recently looking at landfill because I am doing a stint with the Industry and Parliament Trust and, for my sins, I opted to go for waste recycling as something I was particularly interested in. I have spent a good deal of time talking to people who either pay landfill tax or contribute to the industry in some way. My view is that it is an excellent tax. It follows, of course, from an EU directive and as a fiscal instrument it works pretty well, in the sense that we are now recycling, reclaiming and reprocessing a great deal.

We are also burning a great deal, although we do not talk about incinerators now. We talk of many of the facilities as creating energy from waste, because we do not want to use the word incinerator. There is a tension between incineration and recycling, which probably most people will be aware of. Incinerators need to be kept at a certain temperature, need to be fed all the time and, once built, need to be kept working year after year.

Hon. Members should be aware that the process of administering the landfill tax is heavily bureaucratic. There are probably more people involved in the paperwork associated with shifting waste around the country than in actually shifting waste around the country, with a lot of unnecessary on-costs.

I am concerned about where we are heading in the long term. There has clearly been a dramatic change in behaviour by local authorities, waste disposal authorities and so on, because costs have gone up appreciably. Fifty years ago it was about only £22 per tonne and now it is heading towards £80 per tonne. The Government have done things in addition to putting up the cost. They have dropped the landfill allowance trading scheme and withdrawn PFI credits from a number of waste disposal authorities that recycle waste or use it effectively rather than have it go to landfill.

There is a possibility that a few years down the line this could indirectly be a stealth tax. I was reading earlier, by coincidence, a submission from the Liverpool city region about waste disposal in its area. It reckoned that it was heading for very promising figures. It said it was recycling pretty well 90% of its waste, but then there would be 10% left that could not usually be disposed of in whatever way, through incineration, recycling or reuse. Some things at the end of the day are safest put into land. Asbestos is something that primarily has to go into land. That is the only satisfactory way to dispose of it.

I want to know what will happen when certain waste disposal authorities have responded to the nudge and the fiscal imperative and got to a point where they can go no further and where it is the rational, sensible thing to stick stuff into land. Will they continue to be taxed? In which case, will the tax perform simply as a straightforward levy? It would be a kind a stealth tax that no one really noticed was being paid.

Landfill has an ultimate value. I am told that wise people are buying old landfill sites on the grounds that it will soon become more cost-effective to reclaim metal from an old landfill site than to extract it from ore. I want to find out where the Treasury thinks we are heading.

Fiona O'Donnell (Labour, East Lothian)

I am interested to hear the hon. Gentleman say that there is interest in land that was used formerly for landfill. Does he think that that is linked to the fact that last year, the Government brought in legislation that loosened some of the restrictions on the use of possibly contaminated land?

John Pugh (Liberal Democrat, Southport)

The hon. Lady is a greater conspiracy theorist than I could possibly be. If we take into account the increase in landfill tax, the abandonment of the landfill allowance trading scheme and the withdrawal of PFI credits, which will make the landfill tax obligation easier to fulfil for some waste disposal authorities, we could be tempted to go down the road of suggesting that the Treasury, although we do not doubt its green credentials, has in mind a steady revenue stream for the future here, unless we can portray the landfill tax as what it is supposed to be under the EU directive: a fiscal instrument, designed to reduce landfill and no more. Will the Government tell us where they think we are ultimately heading with that particular tax?

Sajid Javid (Conservative, Bromsgrove)

Clause 196 increases the standard rate of landfill tax from £72 per tonne to £80 per tonne with effect from 1 April 2014. By way of background, the landfill tax has been successful in reducing the amount of waste sent to landfill; since it was introduced in 1996, the amount of waste sent to landfill has nearly halved. The benefits of that reduction are twofold. First, the economy benefits from our making better use of valuable resources, rather than simply tipping them into a hole in the ground. Secondly, greenhouse gas emissions from decomposing waste are reduced.

The landfill tax also plays a significant role in reducing the volume of waste sent to landfill to meet the targets set out in the landfill directive. That minimises the risk of incurring the substantial penalties that falling short of those targets would trigger. If waste is not sent to landfill, as we have just heard from my hon. Friend the Member for Southport, it goes to alternative, more sustainable waste management practices such as recycling.

The June 2010 Budget confirmed that the standard rate of landfill tax would increase by £8 per tonne each year until 2014. The Government also confirmed that that rate would not fall below £80 per tonne between 2014 and 2020. By confirming that £8 per tonne increase for 2014-15, we continue to provide certainty for the waste management industry to invest in infrastructure for alternative means of waste disposal.

The environmental impact of lower-rated waste is significantly less than that of standard-rated waste. The current rate adequately reflects that impact. Therefore, the lower rate of landfill tax, which applies to less polluting waste such as rocks and subsoils, will remain frozen at £2.50 per tonne for 2014-15.

The increase in the standard rate of landfill tax will affect businesses and local authorities that send waste to landfill. However, by managing their waste more sustainably and reducing the amount of waste that they send to landfill, they will be able to reduce their landfill tax liabilities. In addition, the costs of the tax and the necessary investment in waste infrastructure were considered as part of the spending review process and included in the local government settlement.

To turn more specifically to the questions raised, the hon. Member for Newcastle upon Tyne North asked about potential future changes in the rates. I confirm that we have set out that the standard rate of £80 will remain at least at that level between 2014 and 2020, which provides confidence to businesses that in the future it will not suddenly become cheaper for waste to be sent to landfill. Beyond that commitment, we have yet to make any policy decisions on the rate for the years between 2014 and 2020, other than that minimum level. The rates of landfill tax, as with any other tax, however, will remain under constant review.

The hon. Lady also asked about the lower rate. We are comfortable that the environmental impact of the lower-rated waste is significantly less than that of the standard-rated waste, and that the current rate of £2.50 per tonne adequately reflects that impact. We will keep the rates under review, but we currently have no plans to change the lower rate.

My hon. Friend the Member for Southport made a couple of points. He asked if we had considered the impact of the changes made under the clause. The Government do not routinely undertake an impact assessment on rate changes of this type—or on rate freezes—so there is no assessment in this case. He used, I think, the words “stealth tax” and said, if I understood correctly, that even when a local authority sends the maximum amount possible to alternatives to landfill, a small proportion of the total waste still needs to go to landfill, so the authority is unable to avoid a minimal level of landfill tax. His assessment is right, but that is a necessary feature of a tax system that incentivises people to use less landfill and look for alternative, more sustainable sources.

The clause increases the standard rate of landfill tax, as announced at Budget 2010 and confirmed in Budget 2013, and I therefore move that the clause stand part of the Bill.

Clause 197 - Climate change levy: main rates

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The climate change levy came into effect in April 2001. It serves as a tax on the non-domestic use of energy such as gas, electricity, liquefied petroleum gas and solid fuel by the business, service and public sectors, and is aimed at promoting energy efficiency and the use of renewable energy so as to meet the UK’s international and domestic targets for cutting greenhouse gas emissions.

Since the rates were introduced in 2007, they have kept pace with inflation. The levy has, therefore, maintained its environmental effect, and on each occasion the rates have increased the changes have been legislated for in the previous year’s Finance Act—precisely what clause 197 provides for. I could say many things about the Government’s efforts to be, in their words, “the greenest Government ever”, but I will save my comments for our discussion under clause 198, to which we have tabled an amendment, and refrain from digressing here.

Sajid Javid (Conservative, Bromsgrove)

The clause increases the rates of the climate change levy from 1 April 2014, in line with retail prices index inflation. The new rates will apply to suppliers of taxable commodities to businesses and the public sector on and after that date. The clause increases the rates of the levy from April 2014 in line with RPI, which has been standard practice since 2007. If there are no questions from members of the Committee, I simply ask that the clause stand part of the Bill.

Clause 198 - Climate change levy: supplies subject to carbon price support rates etc

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I beg to move amendment 148, in clause 198, page 116, line 17, at end add—

‘(2) The Chancellor of the Exchequer shall within one year of the passing of this Act provide a report to Parliament on the cumulative impact of the Carbon Price Support rates under Schedule 40 to this Act and changes to the EU Emissions Trading Scheme on the Government’s commitment to reducing carbon emissions.’.

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 40 be the Fortieth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As promised, we will now consider the climate change levy and our amendment to the clause. The issue of the carbon price floor has been much debated, and the explanatory note to the clause sets out the following:

“In order to encourage new and additional investment in low-carbon power generation, the Government announced at Budget 2011 that, following consultation, it would introduce a carbon price floor from 1 April 2013, which it would achieve by amending CCL legislation…Supplies of coal and other solid fossil fuels, gas and LPG used in most forms of electricity generation would become liable to newly created CPS rates of CCL, which would be different from the main CCL rates levied on consumers’ use of these commodities”.

Despite the Government’s intentions and their wish to be the “greenest Government ever”, there are rising concerns about their ability to achieve their commitment to reduce carbon emissions. We therefore tabled the amendment to probe the Minister on what consideration they have given to those concerns and to enable him to explain what they are doing, and will do to, address them. The Minister will be well aware of recent events in the European Parliament regarding the EU emissions trading scheme. I see that rather than going swivel-eyed, many Members are now furrowing their heads down into papers and whatever electronic devices they have to look at rather than engage in what is no doubt a very difficult debate.

Sheryll Murray (Conservative, South East Cornwall)

I am not.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I am pleased that the hon. Lady is not.

As the Committee will know, the EU emission trading scheme was launched in 2005 to combat climate change and was heralded as a major pillar of EU climate policy. The scheme works on a cap and trade basis, so a cap or limit is set on the total greenhouse gas emissions allowed by all participants covered by the system. That cap is converted into tradable emissions allowances, which are allocated to participants in the market. Participants who are likely to emit more than their allocation can choose between taking measures to reduce their emissions or buying additional allowances either from the secondary market, such as companies who hold allowances they do not need, or from member state-held auctions. However, in April this year, attempts to deliver a vital reform to the scheme failed thanks to the votes of a majority of Conservative MEPs and one Liberal Democrat MEP in the European Parliament.

Rory Stewart (Conservative, Penrith and The Border)

In the interests of proving that not everybody has their head in an electronic device, may I ask the hon. Lady to reflect a little on the fundamental principles underlying this form of carbon purchasing? Would she not agree with Professor Dieter Helm of Oxford university that it would be better to target taxation on the consumption rather than the production of carbon, and that the net effect of taxing the production of carbon in the European Union has simply been to drive carbon-emitting industries to places such as China, meaning that although our production is reduced, our consumption of carbon has significantly increased?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the hon. Gentleman for that considered contribution to the debate. However, we are constrained in this Committee to debate the measures before us. The one before us now is the climate change levy and supplies subject to carbon price support rates, and we are reflecting upon the Government’s approach in this regard. I detect from his comments that he sympathises with the MEPs who voted down reforms to the scheme. I will go on with my comments as, regardless of the merits or non-merits of this approach to reducing carbon emissions, there is still the question of the Government’s intended direction for this policy, which is the purpose of our probing amendment today.

Ben Gummer (Conservative, Ipswich)

The hon. Lady is wrong about my hon. Friend. He was making a philosophical point and was not in any way allying himself with the position of Conservatives in the European Parliament. Before she starts making assumptions about the knowledge of the ETS on the Government Benches, I should point out that we are in this mess because of the dilatory approach that the former Secretary of State for Energy and Climate Change—her leader—took to the negotiations on the second round of carbon credits at the end of the previous Administration. It meant that there was a surplus of credits in the market and the scheme collapsed as a result.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The hon. Gentleman’s comments lead on nicely to the point I was going on to make, which relates to that vote in the European Parliament. That was vital because the price of carbon had previously crashed due to the surplus of permits on the market. The reforms that were voted on, known as back-loading—strongly supported by the Government—would have propped up the price of carbon in the ETS market by delaying the auction of new emission permits. However, the vote was close enough that the actions of those Tory MEPs and one Liberal Democrat MEP made sure that the reforms did not pass. As a result, the price of carbon has continued to collapse and the EU’s credibility on climate policy has been damaged.

I will quote from what the current Energy Secretary said about the EU’s emissions trading scheme before the vote:

“The current low carbon price, caused by the large over-supply of allowances in the market, risks damaging growth and investment in green technologies. Removing some of these allowances over the next few years would help to restore confidence in the market, before longer-term reforms to strengthen the system can be brought in. An agreement on this now would minimise uncertainty in the market.

Any delay could lead to greater costs in the long-term in meeting the EU’s 2050 objectives and would undermine the move to a low-carbon economy. If back-loading and structural reform are not supported, Member States may adopt unilateral policies to deliver their energy and climate objectives and stimulate investment, creating a complex patchwork of climate legislation across the EU that is inefficient and increases regulatory burdens on industry.

The EU Emissions Trading System…is a cornerstone of climate change policy, which is helping the UK meet its climate change goals and ensures that emission reductions in energy intensive industries are achieved at the lowest cost”.

Those events have had a significant impact on the measures we are debating, because the UK’s carbon price support was supposed to operate in conjunction with the emissions trading scheme to make sure the price of carbon never went below an agreed floor, with the CPS rate set as the difference between the target carbon price and the EU emissions trading scheme carbon price.

The Government have set out the rates up to 2016 in the clause. I think the Minister will agree that they are significantly higher than many in the industry were expecting, with the result that the rate is rising so far at around 100% a year. The Government may seek to justify the rise in carbon floor prices on the basis that they are compensating for the emissions trading scheme’s continued collapse. However, there are several concerns about the possible consequences of the rise, especially when set against the background of all the problems with the EU emissions trading scheme; that is why our amendment asks the Government to commit to a conducting a review of the impact of the measures.

The first concern is that, with the collapse of the EU emissions trading scheme and the rise of the carbon price floor in the UK, the differential between what the UK pays in carbon taxes and what the rest of the EU will be paying will grow ever wider. Not only could that make our economy less competitive; it could also lead to more companies taking the decision to build new generation plants outside the UK and sell us energy via an interconnector to avoid the carbon floor price, rather than building new plants in the UK. The second concern is that the hike in the carbon floor price will lead to higher household bills as companies simply pass the tax on to consumers.

Those concerns are significant. It would be helpful if the Minister could reassure businesses and consumers by answering some of our questions as well as committing to keeping the impact of the measures under review. First, will the Minister explain why the rates have been rising so rapidly from what was initially announced by the Government? What assessment has he made of the cumulative impact of the collapse of the EU emissions trading scheme and the measures in the clause on the commitment to reducing carbon emissions?

The policy objective for the measures states that the carbon price floor

“is designed to provide an incentive to invest in low-carbon power generation”,

and the summary of impacts notes:

“In Great Britain, these measures are not expected to have any significant economic impacts.”

Ben Gummer (Conservative, Ipswich)

Will the hon. Lady reflect on my point that the reason we are in this mess is partly because of the failure of her party leader to do what he should have done when he was Secretary of State for Energy and Climate Change? I also want to flesh out the Opposition’s position on this matter: do they wish to see a lower carbon floor, or the same one, or a higher one, or a new negotiation—what precisely are they looking for?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I understand the hon. Gentleman’s desire for me to reflect on the past, but our focus is very much on the future. His party is in power and has the power to make a difference to not only this country’s carbon emissions, but the price of energy for ordinary consumers. That is why I am proposing our amendment today, which calls on the Government to keep such issues under review. I understand that the hon. Gentleman wants to flesh out and probe Opposition policy, but that is not in the scope of the amendment or our discussions today.

Ben Gummer (Conservative, Ipswich)

The hon. Lady rightly said that the ETS is one of the pillars of the carbon regime that the Europe Union is using to fight climate change. If that is the case, what is the Opposition’s policy on the price that the carbon floor should attract?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

When I said that the ETS is a cornerstone of combating climate change, I was actually quoting a Minister in the hon. Gentleman’s Government. My comments are focused on what this Government are doing to take on some of the serious challenges posed.

Given the concerns that I have touched on, I am sure that members of the Committee and members of the public would like to know what assessment the Minister has made of the cumulative impact of the collapse of the EU ETS and the level of rates in the measure on the UK’s competitiveness in this sector, on the prospect of investment and on jobs and growth, which must be key focuses for the Government. What assessment has he made of the cumulative impact of the collapse of the EU ETS and the measures in the clause on household bills in the UK? Will the Minister remind us how much the Exchequer is expected to receive in revenue as a result of the carbon price support rates? What consideration has been given to the growing calls for revenue from carbon taxes to be used to fund energy efficiency drives?

Earlier, I read out the Energy Secretary’s statement on the EU ETS. After the vote by his colleagues in the European Parliament, he published a joint statement with eight other European Ministers calling on the Council and Parliament to

“take the urgent steps necessary, working constructively together, to come to a swift resolution of the backloading proposal by July of this year at the latest”.

Can the Minister confirm that it is still Government policy for the carbon price support to operate in conjunction with the EU ETS? If so, will the Minister update us on what the Government are doing to get the EU ETS back on track, and what conversations he or other Ministers have had with those Conservative MEPs who voted against the necessary reform of the scheme to ensure that it does, in fact, have a future?

In the policy objective for this clause, the Government state that the carbon price floor is designed to provide

“greater support and certainty to the carbon price in the UK’s electricity generation sector.”

What impact have such measures, alongside events in the European Parliament in April, had on confidence and certainty in the industry?

John Pugh (Liberal Democrat, Southport)

The hon. Lady normally suggests that she asks the Government to do simple things. In this case, she is asking the Government to do something awfully difficult, namely to produce within one year an assessment of the cumulative impact of the EU emissions trading scheme, which is identified as extremely volatile and changeable. I think I was in a Committee room such as this when David Miliband was the Environment Secretary and he was discussing the scheme’s prospects. Since then, it has changed rapidly, has gone through various incarnations and continues to change. In 2012, the European Commission called for further major changes. How can the Government possibly comply with what might on the face of it seem a simple request given her analysis of the scheme on which she wants to know the Government’s policies’ impact?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

If the hon. Gentleman reads our amendment, he will see that it calls for the Chancellor to make a report to Parliament on the cumulative impact of the carbon price support rates and changes to the EU emissions trading scheme on the Government’s commitment to reducing carbon emissions and on jobs and growth. That obviously has to relate to recent events that will impact on jobs and growth, and the Government’s commitment to reducing carbon emissions over the next 12 months.

The Government should not underestimate the important impact of recent events concerning the EU emissions trading scheme on confidence in the market, and confidence to invest in the UK. They should also keep under review what impact that has over the next few months and see whether investment decisions are made that are detrimental to the UK and whether household bills go up as a result of additional taxes being passed on to the consumer.

I appreciate the concern that the hon. Gentleman expresses for the Government and their capacity to do this. I think that ultimately taxpayers will want to know the consequences that recent events at the EU Parliament will have on the ability to move back into economic growth on a sustainable basis to which we are all committed. The Government state they are very much committed to being the greenest Government ever. Let us see that put under review, using the Government’s great resources to take stock of where we are and what changes should be made to put us in a better position.

Sajid Javid (Conservative, Bromsgrove)

Clause 198 introduces schedule 40, which consolidates all the primary legislation needed to introduce the UK’s carbon price floor. By way of background, at Budget 2011 we announced the introduction of a carbon price floor from 1 April 2013. The Finance Acts of 2011 and 2012 included the initial primary legislation.

The price floor is an important first step in our electricity market reforms. It will provide an early and credible signal to incentivise investment in our ageing electricity infrastructure. For solid fuels, gas and liquefied petroleum gas, the carbon price floor is achieved by charging carbon price support rates of climate change levy on those fuels when used to generate electricity. For oils used to generate electricity, the carbon price floor is achieved by reducing the amount of fuel duty that is reclaimable on the oil by the carbon price support rates of fuel duty.

Allow me to set out what the schedule does. It consolidates previous legislation into a single schedule, to ensure it is simple to understand, and it also makes a number of changes to previous legislation. First, it sets the carbon price support rates for 2015-16, which are equivalent to £18.08 per tonne of carbon dioxide. Setting those rates two years in advance is in line with our previous commitment and provides certainty for investors by ensuring the carbon price is in line with the trajectory set out at Budget 2011.

Secondly, it introduces an exemption for electricity generators based in Northern Ireland. That recognises the unique nature of the electricity market in Northern Ireland, which is a joint market with the Republic of Ireland. The exemption will help to support the Northern Irish economy and protect energy security in the region. It will also ensure that carbon emissions in Northern Ireland and the Republic do not increase as a result of the interaction between the carbon price floor and the electricity market there. Finally, it makes a number of technical changes to the administration of the carbon price floor to make the tax fairer and to reduce burdens for those complying with the tax.

At Budget 2013 we announced that energy-intensive industries will continue to receive support in 2015-16, to compensate for the indirect costs of the carbon price floor. That recognises the impact of the CPF on the competitiveness of the UK’s energy-intensive industries and the importance of the industries in supporting the growth of the UK economy.

The CPF is a key commitment for the UK Government in signalling necessary investment in low-carbon electricity generation. Supporting the carbon price will marginally increase the cost of generating electricity, but over the long term the UK stands to benefit from cleaner, cheaper and more reliable sources of low-carbon energy.

Amendment 148 would commit the Government to publishing a report on the impact of the carbon price floor and changes to the European Union emissions trading scheme—ETS—within a year of the Bill’s enactment. The Government continually monitor the impact of policies, and all tax policies are kept under review. An impact assessment on the carbon price floor policy was included in the consultation in December 2010, and the Government have continued to publish tax impact and information notes when changes to the policy have been announced. Five such notes have now been published. The Government will continue to update Parliament on the progress of discussions in Europe on the EU ETS in the usual way. When proposals affect United Kingdom legislation, the Government will consult on the changes, including through making assessments of the impact.

Each year, the Government publish updated projections of future energy use and greenhouse gas emissions in the UK, which take account of the impact of policies such as the carbon price floor and the EU emissions trading system, and allow us to monitor progress towards an emissions reduction target. Certainty in such policies is critical for driving investment and low-carbon electricity generation in the UK. The Government have set out a trajectory for the carbon price floor up to 2013 to provide the necessary certainty. The amendment is therefore unnecessary and would lead to the duplication of work that is done already in the usual course of policy maintenance, so I ask the hon. Member for Newcastle upon Tyne North to withdraw it.

Let me respond to some the questions that the hon. Lady asked. She referred to the impact on UK competitiveness and industry. In 2013, the carbon price floor will add about 2% to the average business electricity bill. In 2011, purchases of energy and water accounted for less than 3% of the total cost of UK manufacturing. In our 2011 autumn statement, we announced a package worth £250 million over the spending review for energy-intensives, and the Budget announced that those policies will continue to 2015-16.

The hon. Lady asked about the impact on households. In 2013, the price floor will add about 1%, or £6, to the average household annual electricity bill. Households in the UK pay the third lowest electricity prices in the EU 15. The UK currently has the lowest rate of VAT on residential energy of all the EU 15, and the total amount paid towards VAT and the cost of energy and climate change policies per unit of residential electricity is among the lowest in the EU 15.

The hon. Lady also asked how the recent fall in the ETS might affect the carbon price support rates for 2013-14 and 2014-15. The recent fall in the ETS rates does not affect those carbon price support rates, so UK industry will benefit from the fall in price in line with its European competitors. As a result of the fall in ETS carbon prices, the Government will collect less—not more—revenue from the ETS carbon price floor. As for the ongoing discussions in the EU on the Commission’s back-loading proposals to which she referred, the UK supports the strengthening of the EU ETS and is engaging with the proposals. The carbon price floor rates for 2013-14, 2014-15 and 2015-16 have been announced and are covered by the Bill, and changes in the carbon price as a result of the decision on back-loading will be taken into consideration when setting the price support rates for 2016-17 and beyond.

I thank my hon. Friends the Members for Penrith and The Border, for Ipswich and for Southport for their contributions. The Government remain committed to supporting the UK carbon price in a cost-effective way so that we have clean, secure supplies of electricity that help to support growth. I therefore hope that the Committee will agree to the clause and schedule.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the Minister for at least responding to the main worries that have been raised. He reassured us that the Government will keep matters constantly under review and are committed to an ETS that works and produces the economic certainty that is needed to ensure that we have sustainability and the greenest Government ever, so I beg to ask leave to withdraw the amendment.

Clause 199 - Contracts that are not taxable

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As is the case with several other clauses, clause 199 results from the introduction of the personal independence payment and the armed forces independence payment from April 2013 as a replacement for the disability living allowance.

Committee members may be aware that the insurance premium tax is a tax on general insurance premiums that is payable by anyone receiving taxable insurance premiums as an insurer, or indeed anyone intending to receive such premiums. However, insurers do not have to charge insurance premium tax on contracts of insurance in relation to motor vehicles that, subject to various conditions being satisfied, are used by or intended for use by a “handicapped person”—the words in the explanatory notes seem to be extremely insensitive—who is in receipt of a specified benefit. I hope that the Minister takes note of the language used in the explanatory notes.

Although the tax information and impact note suggested that the measure would be dealt with via secondary legislation, clause 199 amends paragraph 3 of schedule 7A to the Finance Act 1994 to extend the list of specified benefits to include the new personal independence payment and the armed forces independence payment. The tax information and impact note states that the changes in the Bill are 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”.

However, we also know from the note that

“it is expected that as part of the overall changes to the welfare system, approximately 500,000 disabled individuals”—

that is better terminology—

“will no longer receive either DLA or PIP”.

Does the Minister know how many of the 500,000 people who are expected to be taken off disability allowances have motor vehicle insurance that is currently outside insurance premium tax? What impact will the measure have on the cost of motor vehicle insurance for those 500,000 people, or a proportion thereof, who are expected no longer to receive either DLA or PIP, and who will therefore suffer a detrimental impact?

Sajid Javid (Conservative, Bromsgrove)

Clause 199 makes changes to insurance premium tax legislation. It adds references to two new benefits that are being introduced as part of the welfare reforms to ensure that people who are eligible to claim either of those benefits can continue to benefit from an existing IPT relief from 8 April 2013.

The Department for Work and Pensions is reforming the welfare benefits system by bringing in the new universal credit system. As part of its reforms, the Department is partially replacing the current disability living allowance with the new personal independence payment benefit. The Ministry of Defence is introducing the new armed forces independence payment benefit for armed forces personnel who have been injured in action since 2006. The new AFIP benefit begins on 8 April 2013, while the PIP will gradually be phased in over a number of years, with people becoming eligible from 8 April 2013.

Existing legislation allows an IPT relief on insurance premiums covering motor vehicles leased by qualifying disabled persons. That legislation needs to be amended to include references to the new benefits so that all eligible people can begin or continue to claim the IPT relief. The changes made by clause 199 mean that the IPT relief can continue to be claimed by eligible persons.

Andy McDonald (Labour, Middlesbrough)

My hon. Friend the Member for Newcastle upon Tyne North talked about the terminology in the Bill. I am a little surprised to see the words “handicapped persons”; I thought we had moved on from that. Will the Minister undertake to review the terminology to determine whether the provision can be put into more acceptable language?

Sajid Javid (Conservative, Bromsgrove)

If the hon. Gentleman bears with me, I usually come to questions towards the end of my contribution. He is right to raise that point, and I will address it in a moment.

The changes made by clause 199 will mean that the IPT relief can continue to be claimed by eligible persons. The measure is expected to have a negligible impact on the Exchequer and will not have any significant economic impact.

The hon. Member for Newcastle upon Tyne North asked about the use of the word “handicapped” in the explanatory notes. I share her concerns; I noticed that word the first time I read the notes. However, that particular word has always been used in IPT legislation, for example in paragraph 3 of schedule 7A to the Finance Act 1994. We have moved away from using such language, and, as the hon. Lady rightly said, “disabled person” would be much more appropriate. I will take that issue away and see whether we can do anything about it. Even though the term is in historical legislation, we should concern ourselves about something that is so important. I therefore respect the point raised by the hon. Lady and the hon. Member for Middlesbrough.

Sajid Javid (Conservative, Bromsgrove)

I was about to come to an end. I had to deal with one final question from the hon. Member for Newcastle upon Tyne North. Of the 500,000 likely to lose out, how many have been taken out? The intention of the measure is to ensure that those entitled to claim PIP and AFIP can retain access to IPT relief. Any reduced entitlement is a consequence of the DWP reforms, which mean that fewer people are qualified for PIP than for DLA at present. We do not have the numbers for IPT specifically, but by 2018 under PIP, 230,000 people will receive the same or higher award, with 150,000 receiving more money than under the DLA system.

Clause 213 - Trusts with vulnerable beneficiary

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss the following:

Government amendments 110 to 124.

That schedule 42 be the Forty-second schedule to the Bill.

Sajid Javid (Conservative, Bromsgrove)

Clause 213 and schedule 42 update the tax code for trusts with vulnerable beneficiaries in two main ways. First, they ensure that the special look-through tax treatment for such trusts remains properly targeted as DLA is replaced by the new PIP. Secondly, they simplify the rules more generally by aligning conditions on how trustees can use the income and capital of the trust.

By way of background, trusts can be a sensible way to provide financial support for a vulnerable person, in particular for someone unable to manage money. Beneficial tax treatment is given to such vulnerable beneficiary trusts under which, in essence, the tax liabilities are calculated as though they had arisen on the beneficiary rather than on the trustees.

Under long-standing rules, trusts qualifying for that treatment have included those set up for certain disabled persons: those who cannot manage their affairs because of a mental disorder; those in receipt of attendance allowance; and those in receipt of the higher or middle rate care component of DLA. From 8 April 2013, however, the new PIP began to replace DLA for those of working age—those aged from 16 to 64—and so a new definition is required.

The provisions introduced by clause 213 and schedule 42 are designed to ensure that the special tax rules for those trusts remain properly targeted. Schedule 42 will extend eligibility to those trusts where the beneficiary receives the new PIP by virtue of entitlement to the daily living component at either the standard or the enhanced rate. We are also giving access where the beneficiary receives the AFIP or constant attendance allowance instead of one of the other qualifying welfare benefits. That will ensure that eligibility remains objective and straightforward in most cases and that, as far as possible, welfare reform changes do not limit which trusts can qualify.

Schedule 42 also changes the conditions that limit how the trust income and capital can be applied. Those conditions currently vary across taxes. In some cases, the trustees’ discretionary powers are restricted so that capital is applied for the benefit of the vulnerable person; in others, up to half the capital can be applied for the benefit of another person. That difference in approach can be confusing, and it defeats the purpose of having special rules for trusts with a vulnerable beneficiary if significant sums can be applied for the benefit of someone else.

We have therefore decided that the rules should be harmonised so that the trust property is applied for the benefit of the vulnerable person. We have listened to what we were told about the need to have some flexibility, and we have decided that 3% of the trust fund, up to the maximum of £3,000, may be used each year for beneficiaries other than the vulnerable person. To ensure we can update that provision in the future, we have taken a power to amend the limit by Treasury order. We also recognise the potential impact of the changes on existing trusts and wills. We are therefore ensuring that the transitional rules being introduced avoid the need for existing trust deeds and wills to be rewritten.

Let me turn briefly to Government amendments 110 to 124, which make detailed technical changes to ensure the legislation works as intended. Amendments 115, 117, 122 and 123 expand the definition of “disabled person” to include all those who obtain constant attendance allowance, including those who obtain it by way of an increase in disablement pension.

Amendments 110 to 114 and 118 to 121 expand the definition of “disabled person” to include individuals who would be entitled to receive a qualifying welfare benefit were it not for their being in a publicly funded institution, such as a hospital, or abroad.

Amendment 116 ensures that harmonisation of the way in which the trust income and capital can be used is comprehensive, by applying to interest-in-possession trusts in the inheritance tax code.

Amendment 124 ensures that grandfathered rights under the commencement rules are preserved where a codicil to a will, or a new will, is made that continues provision that a qualifying vulnerable beneficiary trust be established.

In conclusion, the proposed changes are fair, they ensure that the special look-through tax treatment for such trusts remains properly targeted and they simplify the rules more generally.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

As the Minister outlined, clause 213, like clauses 12, 70, 188 and 199, has been introduced in part following the introduction of the personal independence payment and the armed forces independence payment, which replace the disability living allowance.

As Committee members will know, a vulnerable beneficiary trust is established for a beneficiary who is either a person with a disability or someone under 18 who has lost a parent through death. Special tax rules rightly exist for the trustees of qualifying vulnerable beneficiary trusts, enabling them to claim relief on income tax, capital gains tax and, in some cases, inheritance tax.

However, as the Minister explained, the existing definition of “vulnerable beneficiary” for tax purposes relies in part on whether the beneficiary is in receipt of the higher or middle rate of the care component of the DLA. Therefore, following consultation, the clause introduces schedule 24 to amend the definition of a disabled person to include those in receipt of PIP or AFIP.

Clause 213 seeks to harmonise the capital and income rules. The tax information and impact note suggests that secondary legislation will, as the Minister outlined, confirm that the amount trustees will be able to apply without having to prove that it is for the vulnerable beneficiary’s benefit will be the lower of £3,000 or 3% of the trust fund each year.

A number of concerns have been expressed about the measures, and I would be grateful if the Minister addressed them in his response. In particular, the Institute of Chartered Accountants in England and Wales is disappointed that the Government did not take the opportunity

“for a complete review of the vulnerable beneficiary regime”.

Will the Minister outline why the Government have chosen to take that rather limited approach, rather than the complete review for which many people, particularly tax specialists, have been calling?

The Low Incomes Tax Reform Group has welcomed the Government’s decision not to limit the definition of “vulnerable beneficiary” to those in receipt of the enhanced rate of the daily living component of PIP, which was the initial proposal in the consultation, but to include anyone in receipt of the daily living component. The group has, however, expressed concern that the definition of “vulnerable beneficiary” has not been framed sufficiently widely to cover all those who need protection:

“Nobody who could benefit from such a trust should be barred from doing so by any inadequacy in the legal definition. In particular, all who are at risk of any form of abuse, exploitation, coercion or persuasion if left to manage their own property should be entitled to the protection a trust can give without suffering a tax disadvantage, and should be capable of being embraced within the definition of ‘vulnerable beneficiary’.”

With that in mind, the LITRG’s response to the Government consultation proposed a three-step approach to defining “vulnerable beneficiary” or “disabled beneficiary.”

I appreciate that the Government’s amendments go some way towards meeting those concerns by making it clear that the definition of “disabled person” includes all those who claim constant attendance allowance or who would be entitled to receive qualifying welfare benefit if they were not in a publicly funded institution or abroad. The Government have obviously declined to take up the LITRG’s three-step proposal, and I would be grateful if the Minister outlined why.

Clause 213 allows trustees to apply small amounts of income and capital, up to the suggested limit of £3,000 a year, without having to prove that it is for the benefit of the vulnerable beneficiary. The LITRG says:

“It is entirely reasonable that…there should be a limit on the extent to which trust capital and income can be used for the benefit of anyone other than the disabled or vulnerable beneficiary. However, the limit proposed…is too inflexible. If, for example, the trustees saw fit to provide necessary accommodation or a break to a carer, they would be unable to do that without breaching the vulnerable trust status. In short, they would be fettered from acting in what they saw as the best interests of the beneficiary by the very rules that seek to protect the interests of that beneficiary.”

The group goes on to say:

“We note that the limit will be set by secondary legislation which we trust HMRC will keep under close review and be prepared to change if the evidence does…show that it should be increased.”

Will the Minister explain the thinking behind the £3,000 and 3% limits? Will he commit to ensuring that HMRC keeps the measure under close review, changing it if it proves contrary to the aims of these tax rules?

Finally, echoing the ICAEW’s concerns, the LITRG has also expressed disappointment that

“a golden opportunity to make more extensive alignments and simplifications to the vulnerable trust regime has been missed.”

Given that that is the remit of the Office of Tax Simplification, the LITRG hopes that the OTS

“may one day get to grips with these complexities and anomalies.”

Will the Minister clarify whether the OTS is indeed looking at or intending to look at that complex area? What proposals are there to do so if that is not already on the agenda?

Sajid Javid (Conservative, Bromsgrove)

I thank the hon. Lady for her questions. First, she asked why there is not a wider review of the tax rules in this area. The Government’s priority has been to ensure that the special tax treatment of vulnerable beneficiary trusts remains properly targeted after DLA started to be phased out for those of working age from April 2013. We believe the changes ensure that those who receive the daily living component of the new PIP on either the standard rate or the enhanced rate will continue to benefit.

We think the changes strike the right balance between simplification and acting quickly, and they also ensure that we take the opportunity to harmonise how trustees across the different types of vulnerable beneficiary trusts can use the trust income capital, thereby making it simpler to comply with the rules. I assure the hon. Lady that we will keep that and other aspects of the regime under review. We are more than happy to have further discussions with stakeholders on potential future changes and on how they can be practically achieved.

The hon. Lady also asked how many people would be affected by the policy. Our assessment shows that, including all those who claim the daily living component of PIP, broadly the same number of people can potentially qualify. We anticipate that those most in need of a trust will continue to qualify in the same way as before. If a person does not qualify for the daily living component of the PIP, they may still be able to qualify if they meet one of the other definitions, such as being incapable of managing their own affairs—if they have a mental disorder, for example.

The Government amendments, as the hon. Lady noted, will expand the definition of “vulnerable person” to include those claiming the armed forces independence payment or the constant attendance allowance.

The hon. Lady also asked about the £3,000 or 3% limit. We have put that in place because allowing amounts to be applied to non-vulnerable beneficiaries is justified where there is a consequential benefit to the vulnerable beneficiary. I think we all agree that where there is no benefit to a vulnerable person, allowing such a payment would defeat the whole purpose of having special rules for vulnerable beneficiary trusts and reduce the funds available for the vulnerable beneficiary.

In our discussions with the Society of Trust and Estate Practitioners, an interested party, it said that it is not always clear whether the payment is for the benefit of a vulnerable beneficiary or another individual—to pay for their carer to have a much-needed break, for example—and that there is a need for some flexibility and reform. We received similar feedback from the Low Incomes Tax Reform Group and the Chartered Institute of Taxation.

The 3% restriction is designed to stop relatively large amounts of smaller funds—trusts with funds below £100,000—being paid to non-vulnerable beneficiaries. We think that the £3,000 limit strikes the right balance between the flexibility required and fairness. It will enable small amounts to be spent by trustees without concern that they benefit someone other than the vulnerable beneficiary.

I confirm to the hon. Lady that we will keep that under close review. Having the power to change the limit by order will provide flexibility in the future. We are keen to ensure that the limit is always fair and sensible, and that it works to the advantage of the people whom the trust arrangement is trying to help.

Schedule 42 - Trusts with vulnerable beneficiary

Clause 214 - Unauthorised unit trusts

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause will provide the Treasury with a power to introduce regulations on the tax treatment of trustees or unit holders of unauthorised unit trusts at a future date, with effect from Royal Assent of the Bill. Its aim is to counteract their use for avoidance purposes, which is an aim that the Opposition support.

The tax information and impact note suggests that the provision is intended to help close a tax gap, which is welcome. However, it also suggests that the measure will have a negligible impact on the Exchequer. Given the limited information set out in the note about the tax avoidance aspect of the measure, will the Minister outline how widespread the problem that the measure is intended to deal with is? That would be helpful to the Committee. How much tax does he estimate has been lost or avoided through the use of unauthorised unit trusts? Given that they are expected to have a negligible impact, it would be interesting to see what those calculations have been. In view of HMRC’s low estimate of the tax gap, which currently stands at £32 billion, and given that the tax information and impact note states that this measure will help to reduce it, could the Minister tell us by how much? I appreciate that these measures will be introduced via secondary legislation, given the fast moving nature of collective investment funds. As the use of regulations allow for the changes to be made more quickly, could the Minister give us an estimate of the time scales for the introduction of these measures?

David Gauke (Conservative, South West Hertfordshire)

Clause 214 will enable us to introduce new tax rules for unauthorised unit trusts and their investors. UUTs are pooled investment vehicles. Most UUTs are used solely by exempt investors such as pension funds that are not required to pay tax on any gains they realise. However some have been used by non-exempt investors in abusive avoidance schemes. We therefore announced in our paper “Tackling tax avoidance” at Budget 2011 that UUTs would be included in the review of high-risk areas in the tax code. At the same time, the Government committed to simplify the rules and reduce administrative burdens for exempt investors. The changes made by the clause provide the Treasury with the power to set out the tax rules and administrative machinery for UUTs and their investors in regulations. This is consistent with the approach used for other forms of collective investment vehicle, the principal benefit being the ability to respond quickly to commercial or regulatory change.

The clause provides a power to make further changes through regulations. These proposed changes have been subject to full consultation, initially on broad options in June 2011 and on detailed proposals in May 2012. A summary of responses, a draft Finance Bill clause and draft regulations were published for comment in December 2012. The changes were broadly welcomed by the industry, but, where appropriate, amendments were made in response to concerns about some of the proposals. Those principally concerned sanctions that might apply in the case of minor and inadvertent breaches of the rules and ensuring that investment in UUTs remained tax efficient for pension funds and other exempt investors.

The first regulations provided for by the clause will be subject to the affirmative procedure and are expected to be introduced after the summer recess. A draft of regulations has been published for further comment and is available to the Committee. I have set out the process of consultation that we have undertaken. The question of why it has taken so long to address this matter of tax avoidance has been raised. It is worth pointing out that the Government acted immediately in 2010 to close down an abusive avoidance scheme that was disclosed to HMRC. However, reform is still necessary to simplify rules that have become increasingly complex. That will help to protect against future abuse. The Government have consulted and officials have been working with industry to make sure that any changes do not adversely affect exempt investors such as pension funds.

The hon. Lady asked how much tax would be safeguarded by this measure. It is correct to say that there is no scorecard figure for revenue protection, as avoidance schemes tend by their nature to be novel and do not always work as intended. However, previous schemes that have sought to exploit the UUT rules involve tax risk in the hundreds of millions. The measures introduced in regulations will simplify and make fundamental changes to the rules that will remove opportunities for avoidance.

The hon. Member for Newcastle upon Tyne North raised the issue of the tax gap. The approach that the Government have taken on the tax gap calculation is consistent with that of the previous Government. The numbers are looked at carefully. I remember the right hon. Member for East Ham (Stephen Timms) when he was Financial Secretary in the previous Government defending the methodology for that tax gap calculation. There have been no changes. I am sure that the hon. Lady is aware of some of the weaknesses in the methodology used in one of the more prominent alternative calculations.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister has misinterpreted my query. I was not questioning HMRC’s method of calculating the tax gap, but pointing out that others would deem it a conservative estimate. There are many other areas of tax avoidance that, by common agreement, should be addressed. The G8 meeting under way now is looking at some of those issues. We should always bear in mind when talking of the official tax gap that it is a conservative estimate. Other revenue is potentially there that members of the public would like to see collected and for the necessary changes to be made to do that.

David Gauke (Conservative, South West Hertfordshire)

I am tempted to go quite a long way down that road because there are a number of issues there. There are different definitions of tax avoidance. Some behaviour that is consistent with the law may still be considered by some to be unacceptable and be included in that calculation. I strongly defend the HMRC assessment as a proper tax gap, but there are of course policy choices for Governments to address some of those points.

This particular provision protects revenue and is an important part of what we are doing to address tax avoidance, along with a large number of other measures, including support for HMRC. The G8 meeting in Lough Erne, now completed, has demonstrated further progress in dealing with tax avoidance and evasion. I am pleased with that further progress today.

The clause supports the Government’s objective of closing the tax gap. It will also enable simplification of a complex part of the tax code and reduce burdens for business and exempt investors. I hope that it can stand part of the Bill.

Clause 215 - Statutory residence test

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss the following:

Government amendments 125 to 135.

That schedule 43 be the Forty-third schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 215 introduces schedule 43, which provides a statutory residence test for individuals. That new test will provide greater clarity and certainty for individuals when determining their resident status for tax purposes in the UK.

Until now, there has been no formal statutory definition of tax residence. There is very little relevant legislation, so the definition has largely rested on legal cases decided in the courts over a long period of time. Many of the cases were very old and did not reflect modern technology and travel patterns, which have changed the way people live their lives. The result is that the previous residence rules were vague and complicated. Knowing a person’s tax residence is essential for determining their tax liability. Tax and professional bodies have long argued that this lack of certainty is unsustainable and unfair to the taxpayer. In Budget 2011, therefore, the Government announced that they would introduce a statutory definition of tax residence to provide greater certainty and clarity for people moving between countries. The test will replicate as far as possible the residence outcomes delivered by the current rules, but will provide greater certainty for the taxpayer.

The test takes into consideration the days spent in the UK and connections to the UK. It is structured in three parts. First, the automatic overseas tests determine whether the individual is automatically non-resident; if so, that is conclusive. Secondly, for those not automatically non-resident, the automatic UK test determines whether an individual is automatically resident; if so, that is conclusive. Thirdly, for those whose position is not decided by one of the automatic tests, a sufficient ties test determines residence based on a combination of the amount of time spent in the UK and the number of ties with the UK that a person has.

The test also allows an individual who meets certain situations when coming to or leaving the UK to split the tax year so that they are taxed for most purposes as if resident for the UK part of the year and non-resident for the overseas part of the year. Finally, the test includes anti-avoidance provisions, which treat certain income and gains arising to individuals who leave the UK temporarily as accruing in the period of return; tax is then levied at that point.

I shall now provide an outline of the Government amendments. Amendment 132 has been tabled to the rules for individuals who come to or leave the UK part way through the tax year. There are eight different circumstances in which the tax year can be split into an overseas part and a UK part. At present, the legislation ensures that the case that maximises the UK part of the year should be applied when an individual qualifies under more than one case. However, stakeholders have told us that in some situations the legislation will result in outcomes that would be unexpected and illogical. To address that issue, we have included a replacement rule, which provides an order of priority for the split-year cases. Amendment 132 will ensure that the legislation delivers a fairer result.

Government amendment 135 has been tabled to introduce a transitional rule for individuals and their spouses who return to the UK in 2013-14 from working full time overseas. Government amendment 125 corrects a technical oversight in the legislation whereby an individual who finishes working in the UK just before the start of a tax year could become UK tax resident by spending only a day working in the UK in that tax year.

Government amendment 126 ensures that people who leave the UK but keep a home here and who happen to die while living overseas will not be treated as being resident here as long as they have spent sufficient time in the tax year up to the date of death in an overseas home. Finally, other Government amendments have been tabled to correct minor drafting errors in the legislation.

The statutory residence test has been developed in conjunction with the reforms to ordinary residence and in part with the reforms to statement of practice 1/09. Both those other reforms form part of the 2013 Finance Bill. HMRC has recently published full customer guidance on the test along with a pilot version of a new online tool to help customers determine their residence status by answering the relevant questions about their time spent in the UK and other circumstances. Around 4,000 people visited the tool in the first week it was available.

The statutory residence test applies clear and objective rules that test the time spent in the UK and the connections that a person has to it. The test will be simple for the vast majority of people to apply, although there are more detailed rules for those in more complicated situations. Overall, the test will bring greater certainty and clarity to all taxpayers, in particular those who move between countries and whose present status may be uncertain.

Sheila Gilmore (Edinburgh East) (Lab) rose—

Sir David Amess (Conservative, Southend West)

I call Catherine McKinnell.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank you, Mr Amess, and thank the Minister for his explanation. I am sure that when he responds to the queries I am about to raise, my hon. Friend the Member for Edinburgh East will be able to pose an additional question to him. As the Minister has explained, clause 215 and the incredibly long schedule 43 introduce a statutory residence test, made up of a series of tests, which will determine an individual’s residence for tax purposes with effect from 6 April 2013. The statutory residence test introduces a definition of residence for tax purposes, but does not apply to social security or benefits entitlement, so there are still multiple rules for residence. One of the professional bodies, the Chartered Institute of Taxation, described that as “disappointing” and “needing attention”, so I would be grateful if the Minister could address such concerns in his closing remarks. For the first time, the new rules lay down a statutory definition of residence, which has been looked at for a good number of years, but they remain “far too complex”, in the view of the same professional body.

The Institute of Chartered Accountants in England and Wales, because of the sheer length and complexity of the legislation, stated:

“It is doubtful that an unrepresented individual will be able to navigate the legislation correctly particularly if they are not definitely resident and not definitely non-resident but in the middle ground.”

The Low Incomes Tax Reform Group, too, has shared some of its concerns, highlighting:

“Migrants to and from the UK are a mixture of people with varying personal circumstances, but a great many are migrant workers and students on low incomes. These are unrepresented taxpayers who cannot afford professional fees and for whom sources of tax advice are limited or non-existent.”

Returning to the concern that several different definitions of residence remain, depending on the area of government policy, the LITRG goes on to state:

“We stress again that it would be far clearer if all government rules relating to residence were to follow the same definition as closely as possible. The low-income migrant will struggle with rules concerning: their right to live and/or work in the UK; tax; social security contributions; entitlement to healthcare; entitlement to benefits; and, very likely, how the UK rules interact with those in their country of origin. And all without being able to afford advice.”

That is obviously an important concern, and I would be grateful if the Minister could explain how the welcome but complex new rules will be understood by those who are not in the fortunate position of being able to afford tax advice. How will low-income migrants be informed of the need to keep detailed records of their movements in order to prove their position under the new rules?

Furthermore, records need to be kept not only by employees, but by employers. In cases where people are defined as being resident and therefore taxable in the UK and subject to PAYE, but with the penalty regime applicable to PAYE errors—coupled with the recent introduction of PAYE real-time information or RTI—all but the smallest employers will be concerned. Most do not have the benefit of in-house tax teams. Will the Minister outline what support the Government have committed to HMRC to guide employers through the changes?

The commencement date of 6 April 2013 is also a concern. People will be arriving in and leaving the UK during this tax year, but before Royal Assent. Although the draft legislation has been in existence for some months, and its likely shape has been known for some time, in some cases people might have made mistakes before the rules were formally published. Will the Minister therefore outline how such people are likely to be treated, if they fall foul? Can they elect to be treated as resident or not, under the old rules, for the transition year?

On a separate note, can the Minister explain what will happen to people when they cannot leave the UK for reasons beyond their control? Will he confirm that they will not become resident if they are unable to leave the UK, because of—for example—an airport closure, transport delays or some other reason? Will the Minister give some clarification on how such people might be treated?

Finally, given the complexity and length of the new rules, what steps does the Minister intend to take to ensure that they are kept under review, and simplified wherever possible? Will he commit to a date by when the rules will be reviewed, as they are a significant change from the centuries of case law relied on up to this date? In particular, the ICAEW has indicated that

“the stated aim of the legislation is to provide certainty but because of the complexity and the provision that the rules can be changed by statutory instrument, possibly without consultation, it does not achieve that aim.”

If the Minister can also address those concerns, I will be grateful.

Sheila Gilmore (Labour, Edinburgh East)

My question is relatively simple: will the Minister explain exactly how the measure will work for people claiming child benefit? Will exactly the same rules apply?

David Gauke (Conservative, South West Hertfordshire)

Before dealing with the particular questions that have been raised by Opposition Members, for which I am grateful, it is worth reminding the Committee that we currently have a test based on case law. That in itself creates a great deal of confusion and uncertainty. Tax professionals have been calling for a statutory residence test for some years. There have been attempts to deliver such a test in the past, but they have not succeeded. It is therefore something of an achievement finally to have before us a statutory residence test.

I know that the rules are long, and I appreciate that a lot of legislation is included, but it is perhaps worth pointing out that the test has been welcomed, to some extent. In its press release of 11 December following the publication of the most recent consultation documents, the Chartered Institute of Taxation said:

“It is on the surface disappointing that the legislation has grown ever longer but this is a case where longer is better. We need the rules to bring certainty to as many taxpayers as possible and that means spelling out the rules in the law.”

I accept that the legislation is of considerable length, but that reflects the fact that the test is comprehensive, considers a wide range of circumstances and is able to come to the right conclusion.

I do think that the new legislation will be easier to apply than the old rules. The statutory residence test will replace the current uncertain and complicated rules with a test that is more transparent, mechanical and objective. I accept that the new rules will take a little getting used to because they look rather different from the old ones, being much more mechanical, but once users become familiar with the mechanics, they should be more straightforward to apply and result in fewer residence disputes with HMRC.

On the specific question of complexity in the context of migrant workers in low income bands who will not be able to afford expert tax advice, it is worth highlighting the online tool that HMRC will be providing. It takes customers through a series of simple yes or no questions to establish their residence status. That is available to everyone, including unrepresented taxpayers, of course, and it is an advance on what we have had in the past.

In terms of the application to national insurance contributions, we gave careful consideration to including them, but concluded that annual tests for national insurance contributions would require significant structural change and upheaval for employers. It is sensible, at least initially, to keep the existing national insurance residence tests and liabilities aligned with the rest of the social security system. The longer term position will depend in part on the Government’s consideration of greater integration of income tax and national insurance contributions.

As for the application of the rules to other Government Departments, it is true that some Departments look at residence in different ways. In establishing entitlement to pension credit, for example, the Department for Work and Pensions requires customers to have the right to reside and to be habitually resident in the UK, the Republic of Ireland, the Channel Islands or the Isle of Man. Aligning the different residence rules across all Departments would inevitably lead to different residence outcomes for the sections of the public affected, which would have significant Exchequer and other impacts. We need to be careful before we can commit to going down that route.

On whether we will consult on future changes by statutory instrument, it is of course the case that all taxes are kept under review. Clause 215 contains a provision for further consequential or transitional provisions to be made by statutory instrument. We have no plans at present to use that power, but we will follow the usual consultation process if we do.

A question was asked about aeroplane delays or travel disruption of some sort and whether there was any flexibility within the regime. There is flexibility in exceptional circumstances, but whether a situation constitutes an exceptional circumstance will depend on the facts and the circumstances of each. The event in question must be both beyond control and exceptional, and the individual would need to be able to demonstrate that they made every possible effort to get out of the United Kingdom by any means. Adverse weather conditions that tend to happen frequently in winter will not usually fall under the definition, but it is at least in theory possible for them to apply.

I was asked whether it was fair to charge interest on tax unpaid because the rules have not allowed a person to establish their taxable position in time. Interest of course does not penalise; it merely puts the individual in the position they would have been had they paid the correct amount of tax on time.

On whether penalties will result from the submitting of amended self-assessment returns, penalties will arise from the late filing of a return. A fixed penalty of £100 applies if a return is not filed by the appropriate deadline. People normally have 12 months from 31 January after the end of the tax year to correct a return they have submitted. There will be no penalty attached to additional tax paid as a result of an amendment provided that the individual has made their best endeavours to submit complete and correct information, but interest will be due in accordance with the late payment interest rate, which is currently 3% for all the main taxes.

On the question about child benefit, we have not extended the statutory residence test beyond tax for the reasons I outlined earlier.

I hope that I have provided clarification to the Committee in response to some detailed questions. The reform is significant and will make our tax system more comprehensible and clearer to many people.

Clause 216 - Ordinary residence

Sir David Amess (Conservative, Southend West)

With this it will be convenient to discuss the following:

Government amendments 136 to 140.

That schedule 44 be the Forty-fourth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 216 introduces schedule 44, which abolishes the concept of ordinary residence for most tax purposes. More than 100 provisions in primary legislation that use the concept of ordinary residence, sometimes in conjunction with residence, will in future refer only to residence, which represents a significant and welcome simplification of the tax code.

Previously, people coming to the UK had to think about three things that affect taxation: residence, ordinary residence and domicile. With the reforms, they will have to consider only residence and domicile. The main tax relief available to individuals who are not ordinarily resident, which allows overseas earnings not remitted to the UK to stay out of the UK tax net, will be retained and simplified. That relief, known as overseas workday relief, will be made available to all non-domiciled arrivers who come to the UK having not been UK-resident in the previous three years.

Chris Leslie (Labour, Nottingham East)

I might be able to save the Minister some time, because we have only one question: why will references to ordinary residence remain in some statutory instruments and other pieces of statute? If he addresses that point, we will be satisfied.

David Gauke (Conservative, South West Hertfordshire)

I am delighted that the hon. Gentleman will be satisfied with that. I stood to address the various amendments, but if he is satisfied with the measures—I know that he and his party have carefully read the measures and the amendments that have been tabled—I am happy to bring my comments to a conclusion.

There are a number of places remaining in primary tax legislation where the term “ordinary residence” is used in a very specialist sense, for example when referring to ordinary residence in Scotland or Northern Ireland, rather than in the UK as a whole. We have made a conscious decision to leave those references to ordinary residence in tax legislation as we do not want to change how those provisions are applied.

Given the enthusiasm for the clause, the amendments and the schedule, I am inclined to conclude that the abolition of ordinary residence, which is a vague, subjective and complicated tax status, is welcome. The main relief linked to the status will be replaced with a relief that is far more straightforward and certain. This package of changes has been warmly welcomed by industry commentators. The relief will now be available to all non-domiciled employees arriving in the UK who have not been UK-resident for the previous three tax years, regardless of the length of time they intend to stay here. The relief will be available for the year in which the employee becomes UK-resident plus the two following tax years.

Schedule 44 - Ordinary residence