FINANCE (NO. 2) BILL

Public Bill Committee, 13 May 2014.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules)

Gary Streeter (Conservative, South West Devon)

Welcome back, colleagues. When the debate was adjourned on Thursday afternoon, the Committee had agreed that schedule 6 be the Sixth schedule to the Bill. We now come to clause 49. Only 246 clauses to go.

Clause 49 - Employment-related securities etc

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to consider that schedule 7 be the Seventh schedule to the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Good morning, Mr Streeter. It is a pleasure to serve under your chairmanship again this morning.

Clause 49 and schedule 7 implement a number of recommendations made by the Office for Tax Simplification to simplify the tax rules in relation to employment-related securities such as employee shares or ERS options awarded to employees. The clause changes the tax treatment of ERS and ERS options awarded to internationally mobile employees, introducing a new relief for certain ERS exchanges. It simplifies the rules around nil-paid and partly-paid ERS and extends the corporation tax relief available to companies in relation to employee share acquisitions. The clause also makes some technical changes to the tax treatment of share awards, providing a new relief for certain share-for-share exchanges on takeovers and extending corporation tax relief in certain situations, principally on takeovers and where international moves are involved.

We support the changes made by the clause and the schedule. Given the attempts to obtain some symmetry in the income tax and corporation tax treatment of option gains for internationally mobile employees, what steps will the Government take to align the new rules in respect of national insurance contributions for IMEs? The new rules for IMEs introduce additional costs for the employers of IMEs, in that they will need to update their reporting systems. They will need to track inbound assignees to a greater extent, as they are more likely to be liable for UK income tax, and reporting to Her Majesty’s Revenue and Customs will increase. What is the Government’s estimate of the additional costs involved? Given our earlier discussions about tax-advantaged schemes of this nature, can the Minister say how many companies operate tax-advantaged schemes, what percentage of the UK work force are covered and what the overall cost to the Exchequer will be of the various reliefs in relation to share schemes? Have any studies been done to quantify the positive effects that these have on the UK economy?

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship once again, Mr Streeter.

As we have heard, clause 49 introduces schedule 7, which makes various simplifications to the tax rules for employment-related securities, as recommended by the Office of Tax Simplification. Not for the first time, we are making some changes to the law as a consequence of its proposals. In its report on unapproved employee share schemes, the OTS highlighted a number of areas where the rules could be simplified to make life easier for businesses and employees. This is just one of the provisions in the Bill that implements recommendations made by the OTS. It addresses issues indentified as priorities by the OTS and has been welcomed by consultation respondents as a valuable simplification of complex tax rules.

The clause will change the rules for taxing shares and share options awarded to internationally mobile employees. Currently, whether UK tax is chargeable in relation to employee shares or share options might depend upon where an employee resided at the time these were awarded, regardless of where the work to earn that award was carried out and whether it related to UK or overseas duties. The new rules put the position on a simpler, more orderly and principled basis, broadly reflecting OECD guidance and taking into account where duties were performed. Alongside these changes, we will also extend the availability of corporation tax relief. Relief will be available, for example, where individuals are seconded from overseas to work for a UK company.

We have consulted on these changes, and most respondents were agreed on their simplification potential. However, some concerns were raised about implementation. We therefore propose that the new rules will not come into effect until 2015, which will allow affected businesses and employees to prepare. To avoid businesses having to operate different sets of tax rules, we will apply the new rules to all employment-related securities, regardless of when they were awarded. We are introducing a new relief that will allow certain shares awarded to employees to be exchanged for similar shares without an income tax charge arising—for example, in takeover and merger situations.

We are simplifying the rules on notional loans, which apply when an employee is awarded nil-paid or partly-paid shares. The effect of the change is to provide a relief from a potential tax charge in certain cases where an employee disposes of those shares. There will be new corporation tax relief for certain employee share acquisitions that take place after the takeover of a business by an unlisted company.

Let me turn to the questions raised by the hon. Member for Birmingham, Ladywood. On the current cost to the Exchequer, the tax relief granted under the Government’s four tax-advantaged schemes increased by 10% to £610 million in 2011-12, the latest year for which we have figures. The figures show an increase in the number of companies currently operating one of the Government’s four tax-advantaged employee share schemes, up 3% to 9,260 in 2011-12.

The purpose of the change in relation to internationally mobile employees is to simplify the tax rules, not to raise revenue. In some cases more UK tax may be charged than currently; in some cases it may be less. The changes include new corporation tax reliefs for UK companies with regard to overseas employees. However, it is right and fair that securities income relating to UK work and duty should be taxed as employment income in the UK. International double taxation agreements will continue to protect internationally mobile employees and there will be overrides in the legislation to ensure that the tax treatment is just and reasonable.

The OTS has pointed out that the current rules can impose significant burdens on businesses, particularly when they involve amounts being treated as loans to employees and when separate rules apply for different types of securities. Most respondents to the consultation agreed that the changes have the potential to simplify the position for employers in the longer term. Although there were some concerns about short-term implementation and the need to establish new processes and systems, HMRC has responded by allowing a longer lead-in time before the changes take effect, removing the potential for employers to have to apply two sets of rules when the changes come in.

The hon. Lady asked about the percentage of the work force that is covered. HMRC does not have that figure, but she has some indication of the scale. She asked about the application of the provision to national insurance contributions and whether the rules will be changed in line with the new rules set out in schedule 7. The answer is yes, as far as possible that will be done under international social security agreements. The Government will bring regulations before the House in time for implementation from 6 April 2015. I hope those points of clarification are helpful to the Committee, and I am grateful for the cross-party support for the clause.

Clause 50 - Venture capital trusts

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Government amendments 16 to 19.

That schedule 8 be the Eighth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 50 introduces schedule 8, which makes amendments to the venture capital trust regime to ensure that the tax reliefs are used as the original policy intended and to facilitate different types of investment. The changes should ensure that the VCT regime continues to be well targeted and effective in facilitating access to finance for smaller business with growth potential.

I also want to speak to Government amendments 16 to 19, which clarify the impact of the restriction of VCT returns to capital. The Budget announced a further change to VCTs and the other tax-advantaged venture capital schemes—the enterprise investment scheme and the seed enterprise investment scheme—to prevent low-risk companies already benefiting from particular renewable subsidies from also qualifying for tax relief. I will table an amendment on Report to introduce that legislation. I know that a number of interested parties have raised questions about the types of company that may be affected, so an information note will be published shortly to clarify the scope of the change.

The Government provide generous tax reliefs to individuals taking on the risks of investing in smaller, relatively unproven businesses with growth potential. The VCT regime was introduced in 1995 specifically to encourage investment by retail investors who were interested in investing in smaller, higher-risk trading companies, but who prefer to have their investments made, managed and diversified by a professional fund manager. In 2012 the Government substantially expanded the scope of the VCT regime by allowing companies with up to 250 employees and £15 million gross assets to qualify for investment. Annual investments of up to £5 million were also allowed under the scheme. However, as well as expanding the scheme, the Government have made other changes to ensure that the tax relief continues to be well targeted, supporting high-risk investments into companies that might otherwise struggle to access finance.

In order to preserve the integrity of the regime, it is important that we continue to be vigilant in limiting opportunities for misuse of the generous tax incentives that we offer. It is also important that the regime continues to be relevant to wider changes in the market and does not unnecessarily restrict the regime to one type of investor. The clause makes a number of changes to ensure that the VCT regime continues to be well targeted and effective. The changes are fairly technical; I will provide a brief overview of each in turn. Further information is provided in the response documents and updates on the consultation on VCTs available at gov.uk.

The bulk of the clause deals with two changes that ensure tax reliefs cannot be misused by recycling moneys that benefited from tax relief or returning capital that has not been invested. The first of the changes is described in schedule 8 as linked sales. At Budget 2013, the Chancellor announced his concern that some VCTs were taking advantage of the tax reliefs in the regime in a way that was not intended through a practice commonly known as enhanced share buy-backs. This involved the VCT buying back shares from investors at the same time as providing an opportunity for investors to subscribe for new shares in the same VCT. In effect, the investor’s money was simply being recycled within the fund and their tax relief was being refreshed. In some cases no new investments were being made at all.

If the Government leave that practice unchecked, it is likely to increase the Exchequer cost of the VCT regime without increasing the pool of money available to VCTs for investment in small and medium-sized enterprises. Perhaps more importantly, we were concerned that, without a change in the rules, investor perception of VCTs would become skewed. Therefore, the clause makes changes to restrict VCT tax relief where there is a sale of VCT shares linked to reinvestment. That should prevent taxpayers from receiving multiple rounds of tax relief on the same underlying investment.

The second change is described in the schedule as “return of capital”, and is related to the linked sales of VCT shares and deals with the issue of VCTs using share premium accounts and other reserves to offer investors a tax-free return. Although the return is often described to investors as a dividend, it bears no relation to investments made. In some cases, these returns have been made to investors before the VCT has made any investments into SMEs. The Government recognise that the practice has not been prevalent across the industry, although there have been some examples of misuse. However, we felt that if the rules were left unchanged, the robust action that I have described to limit linked sales from VCTs could quickly be undermined.

Again, without action in this area, arrangements were likely to increase the cost of the VCT tax reliefs, but without an equivalent increase in money invested in SMEs. The schedule therefore introduces a new rule to limit inappropriate returns of capital by restricting the use of these accounts when funds are initially raised and where VCTs may not have made qualifying investments. The new rule limits a VCT’s ability to return share capital that does not represent profits made on investments within three years of the end of the accounting period in which funds were raised. We intended the rule to apply only to new issues of shares.

This approach was agreed with the industry shortly before the Budget this year. However, we have received representations expressing concern that the original drafting might affect pre-6 April share issues, which was not the intention of the policy change. We have therefore tabled Government amendments 16 to 19, which make minor changes to the legislation to ensure that the rule clearly applies only to new capital raised.

Schedule 8 also makes a minor amendment to the VCT legislation to deal with time limits for making taxpayer assessments. The change will ensure that HMRC can make assessments to recover VCT tax relief to ensure that the VCT rules will continue to work as intended, rather than relying on the general rules applicable to making assessments. Investors using VCTs must hold their shares for 15 years to continue to qualify for the tax relief that they have received. However, the VCT legislation does not contain its own provisions as to the time period in which HMRC may make assessments to recover tax relief. HMRC is therefore at present reliant on the general rules applicable to the making of assessments contained within the Taxes Management Act 1970 and the Finance Act 2008.

The general time limits in the legislation were reduced to a period of four years from the end of the relevant year of assessment. That change has the unintended effect that if an investor disposes of his VCT shares in the 12 months before the fifth anniversary of their acquisition, HMRC is time barred from raising an assessment to recover the VCT relief. The change that the clause introduces for time limits for making assessments simply preserves the intention of the legislation and the five-year minimum period for VCT investments.

Finally, the clause provides for investors to invest in VCTs via a nominee. Around 11,000 individuals currently invest in venture capital trusts in the UK. By allowing individuals to acquire their investments via nominees, the Government are facilitating a wider range of investment opportunities. The change will allow individuals to invest via platforms, as is already possible for many other investment trusts—and, indeed, for investments in the enterprise investment scheme. This change should mean that VCT investments will be offered on platforms, alongside other investment products, allowing individuals to compare different investment opportunities. We hope the change will open up opportunities for a broader range of investors to engage with the VCT scheme and support SMEs’ access to finance. We intend to consider this as part of the consultation and evidence-gathering exercise that will take place over the summer. The amendment also provides a power to amend the regulations relating to a VCT’s obligation to provide HMRC with details of their investors.

When speaking to the clause, I said that VCT shares must be held for a minimum of 15 years; the minimum investment period is in fact five years. I apologise if a slip of the tongue may have misled the Committee. With that prompt correction—the Opposition will no doubt have spotted the slip; I am keen to correct it before it is pointed out—let me say that I believe the changes in the clause will result in a better targeted and more effective VCT regime. I hope the clause will stand part of the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to be back in the Committee this morning, Mr Streeter.

It is always good to see a Minister who recognises the error of his ways, even with an inadvertent slip of the tongue. I am glad he was able to correct that point. I thank him for sending us a letter in advance with information about the clause and the Government amendments to it. That is always helpful to us in understanding the Government’s thinking.

I note the Minister’s point about bringing back further issues on Report. I am sure he will be pleased to hear that we generally support the changes to ensure that investors do not benefit from multiple rounds of tax relief on the same underlying investment, which is one issue the clause tackles. I do no intend to go through every detail he has outlined, but it is worth stressing what, as I understand it, the Government are trying to do. As it stands, the legislation could be exploited in a way that Parliament did not intend. It is important we clear up any issues to do with that.

I would like the Minister to respond briefly to a couple of points. I am interested in how investments and venture capital trusts are actively supporting SMEs. How are the Government monitoring that? Can he provide figures for the level of VCT investments in SMEs? Will he also say how many of the companies invested in by VCTs have gone on to be successful contributors to the UK economy? I also want to draw attention to a point made by the Association of Investment Companies, which supplied information in advance of this debate and recognised that

“The need for guidance is not a shortcoming of the amendments proposed.”

Will the Minister say when and how further guidance will be produced?

The Minister wrote in his letter that

“there may be circumstances in which Government would want to disapply or amend the effect of the new legislation, where one or more VCTs merge.”

As he has also said, a power to make such changes by secondary legislation is being introduced. Will he say more about the circumstances in which he would wish to take advantage of that power?

David Gauke (Conservative, South West Hertfordshire)

I thank the hon. Lady for her support for the clause and the amendments to it. VCTs are a long-standing part of our tax system, in place since 1995. I hope that both Government and Opposition Members share the view that it is important that we incentivise investment in the UK and, in particular, that we do what we can to ensure that investors have the opportunity to invest in those smaller businesses that might involve some risk but have potential for high growth. We need an environment that encourages dynamic and entrepreneurial businesses.

In terms of the level of VCT investment and how the Government monitor that, according to figures from the Association of Investment Companies, £435 million was raised for SME investment in 2013-14. There were 27,000 investors in over 2,000 companies in that sector, so we do think it is significant. From speaking to those in the industry, I sense that this area is growing more strongly and that there is considerable appetite for investment, which is encouraging.

HMRC produces guidance for all legislative change. As a rule it aims to do that within about three months of Royal Assent. HMRC will produce assistance for the VCT industry in advance of formal publication, as necessary. As the hon. Member for Kilmarnock and Loudoun said, guidance is a necessary part of the changes; we hope that that will be of assistance.

HMRC monitors all VCT investments through the specialist advance assurance process, which considers applications for investment. That gives HMRC a strong view and perspective on the types of investment in the area. What is desired is a balance between establishing the necessary incentives and ensuring that there is proper focus on high-risk investment. That is why we have in recent years made the changes that we have, ensuring that the VCT regime is properly focused on those high-risk areas. The tax reliefs are generous and should not be given for low-risk investment. However, we believe that high-risk investment—the VCT regime—deserves support.

As to secondary legislation, the VCT industry has indicated that there may be circumstances where VCT mergers merit different treatment. Officials are still exploring that with the industry; hence the precautionary power to make changes in secondary legislation.

I hope that those points of clarification help the Committee.

Gary Streeter (Conservative, South West Devon)

I commend the Minister for his personal knowledge on those technical issues.

Schedule 8 - Venture capital trusts

Clause 51 - Removing time limit on seed enterprise investment scheme relief

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We are making good progress, and I hope that we may continue that in a short discussion of clause 51, which removes the time limit on tax relief for investments through the seed enterprise investment scheme. Previously tax reliefs were limited to investments that took place after 6 April 2012 and before 6 April 2017. Under the new arrangements the scheme is extended permanently. Therefore the provision of the Income Tax Act 2007 that allows the Treasury to extend the scheme by order is removed, as it is no longer necessary.

The SEIS came into effect from 6 April 2012 and was designed to help small early-stage companies to raise equity finance, by offering a range of tax reliefs to individual investors who subscribed for shares with a stake of no more than 30% in the companies. It complements the existing enterprise investment scheme, but offers a higher rate of relief because of specific difficulties that small start-ups have in attracting investment. The investment limit is set at £150,000 for companies that have not benefited from investment under either EIS or VCT, that employ 25 or fewer employees, and that have gross assets of under £200,000. I understand that the Government are also committed to exploring options for tax reliefs to apply when individuals make investments in the form of convertible loans.

We recognise what the Government are trying to do, but I have a couple of questions for the Minister, particularly about the current level of tax relief on investments and the cap of £150,000. Some investors have suggested that it should be higher. Do the Government have any plans to raise the cap on investments eligible for tax relief?

The Minister gave us the benefit of his knowledge of figures about VCTs. Is he able to provide any up-to-date figures for the amounts invested in small start-up companies, through the SEIS in recent years? What is the anticipated level of take-up for the scheme in the years ahead?

In last year’s Finance Bill Committee debates we highlighted that, as in a written response, the Government estimated that 300 completely new companies would benefit from SEIS over the course of a year and that, overall, 1,000 companies would benefit. Will the Minister provide an update on progress towards meeting those estimates and can he provide us with any other information about what will happen in future?

David Gauke (Conservative, South West Hertfordshire)

Clause 51 would make changes to ensure that the SEIS is made permanent. The scheme, which was introduced in 2012, is designed to help small early-stage companies, which often find it difficult to obtain financing in the critical first few years, to attract investment, making it easier for them to grow and become established. The scheme encourages equity investment into qualifying companies, by providing income and capital gains tax reliefs for individuals who invest in shares for such companies.

The scheme currently contains a sunset clause that limits the relief to shares issued on or after 6 April 2012 but before 6 April 2017. The changes made by the clause will remove the 6 April 2017 restriction and permanently extend the scheme, ensuring that vital early-stage funding will continue to be encouraged in new companies, supporting their growth and enabling them to make a valuable contribution to the wider economy.

Richard Fuller (Conservative, Bedford)

May I place on the record my thanks to the Government for the SEIS and the start-up loan scheme and for their commitment to supporting entrepreneurs? The proposal that the Minister is outlining will go further in supporting that. It is important to put support for entrepreneurs on the record.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes an important point. This is about ensuring that we have a more dynamic economy and that it is easier for early-stage seed businesses to find finance. That helpful measure is a key part of our long-term economic plan.

On the size of the scheme, which the hon. Lady mentioned, there is no fixed definition of “seed investment” as such, but having considered evidence regarding the generosity of the tax relief and what is affordable, the investment limits have been set to provide the first tranche of investment required to get a business up and running. The scheme is not intended to provide long-term investment support. The EIS and VCT, which we have just debated, remain available for that purpose. Increasing the limits of the scheme would require us to notify the European Commission about that, which could deem it to be an illegal state aid. However, currently it falls below the de minimis level.

The latest figures for the scheme’s use show that more than 17,000 early-stage companies have now benefited from investment, which is more than anticipated in the numbers that I gave last year; there have been more than 4,000 expressions of interest for future involvement; and more than £150 million of investment has been supported by seed enterprise investment schemes. On the basis of those numbers, certainly compared with what was predicted previously, we believe that the scheme is working well. I am grateful to have had the opportunity to put that on the record and hope that the clause stands part of the Bill.

Clause 52 - Removing time limit on CGT relief in respect of re-investment under SEIS

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The clause would amend the Taxation of Chargeable Gains Act 1992, by removing the time limit currently set on gains accruing to the investor between 2012-13 and 2013-14 on capital gains tax relief for investors reinvesting profits in the seed enterprise investment scheme. It would also extend to changes introduced in 2013, which stipulated that half of the reinvested amount, rather than the whole as previously allowed, can be set against chargeable gains.

Again, the background to this is that to help kick-start the scheme and encourage investment in SEIS, CGT relief was given to chargeable gains accruing to an investor in 2012-13 where the gain was reinvested in shares that qualified for SEIS income tax relief and the amount reinvested was exempt from CGT. That was subject to a £100,000 investment limit, which matches a similar cap on SEIS-related income tax relief. In 2013 the CGT relief was extended to chargeable gains accruing in 2013-14.

We welcome the renewal of the time limit on CGT relief for funds reinvested in SEIS. We recognise the particular difficulties faced by small businesses and start-ups in attracting the necessary finance to grow. It is useful to see the progress that is being made here. We want to ensure that there is a way to incentivise lending to SMEs. I have a brief question on the tax impact and information note, which states that

“the extension of the scheme will also continue to encourage individuals to become entrepreneurs with the backing of SEIS investors.”

What evidence does the Minister have that the tax reliefs available under SEIS actually encourage that entrepreneurship? Have the Government conducted a regional breakdown of the impact of SEIS? What analysis have the Government undertaken to ensure that, given the scale of tax reliefs involved, companies invested in under SEIS are successful in the long term? It is obviously important in terms of the start-up work to look at how they progress in the long term.

David Gauke (Conservative, South West Hertfordshire)

Clause 52 makes changes to ensure that capital gains tax relief for reinvesting in SEIS shares is made permanent. The capital gains tax SEIS reinvestment relief was introduced in 2012, alongside the income tax relief we have just debated, to help kick-start and build interest in seed enterprise investment schemes. The relief was initially introduced as a one-year holiday for the tax year 2012-13 and worked by exempting from capital gains tax any chargeable gains accruing to an investor in that year where the gain was reinvested in shares qualifying for SEIS income tax relief.

In 2013 we responded to stakeholders who said that more time was needed to build and maintain the momentum of interest in SEIS by extending the capital gains tax relief to chargeable gains accruing in 2013-14. At the same time we reduced relief so that the exemption applies to half the qualifying reinvested amount. The changes made by clause 52 will make the CGT reinvestment permanent in the same way as the main income tax relief is being made permanent. That means that any investors making capital gains in 2014-15, or a subsequent year, will receive 50% capital gains tax relief when they reinvest those gains into seed companies.

This is at a very early stage. SEIS has been in place for a relatively short period so it is not easy to make a long-term assessment of which companies are succeeding. Not all start-up businesses will succeed. It is inherent in a dynamic market economy that some will succeed and some will fail. I have given some aggregate numbers for the regional breakdown of where there has been take-up. There will be a regional breakdown as part of the national statistics being published in December 2014.

Charlie Elphicke (Conservative, Dover)

My hon. Friend will recall the studies of the OECD and the European Union, which show that enterprise formation is strongly linked with the growth, and particularly the sustainable growth, of economies. The action that the Government are taking to foster enterprise creation is making a massive difference. There is also the incredible rise in self-employment, with people starting their own businesses, striking out on their own and helping to grow the economy. Is that not a key part of the long-term economic plan?

David Gauke (Conservative, South West Hertfordshire)

I agree with my hon. Friend. For economies to prosper in a sustainable way, it is important to harness the values of entrepreneurism and the entrepreneurial spirit. That is exactly what the Government wish to do.

Richard Fuller (Conservative, Bedford)

On that point, as the Minister is responding to the interesting question about statistics, there is a tension in the Government between those who would like to see an entrepreneur-driven free market approach to how we grow the wealth to pay for our public services and those who would like to see some form of industrial policy that has grand Government-led designs. That is a view that often comes out of the Department for Business, Innovation and Skills. What is my hon. Friend’s view on which of those approaches the clause is designed to support?

David Gauke (Conservative, South West Hertfordshire)

I know my hon. Friend is trying to be helpful. I would say that the clause is about ensuring that we have an entrepreneurial and dynamic economy. My hon. Friend discusses the tensions that may exist. Of most significance to the country are the different approaches to business between the majority party in the Government and the Opposition. No doubt we will have the opportunity to debate those differences at length in future.

As we are discussing clause 52, let me address the specific question about evidence that the seed enterprise investment scheme is working and helping to harness the entrepreneurial spirit. It is very early days, and it is particularly difficult to do a quantitative analysis, although the take-up of the scheme is greater than anticipated. The qualitative evidence certainly suggests that the scheme is encouraging new companies to be set up, supporting entrepreneurship. Given that the scheme has been in place for only a short time, I am grateful to see that.

I have met some of the companies that have taken advantage of the seed enterprise investment scheme, and it has certainly helped them find finance, inspire new ideas and put those ideas into action. We are pleased with the progress that has been made. It is not just the Government who are pleased, because the CBI said in response to the Budget:

“The Government has heeded our call to make the SEIS permanent to boost the range of financing options available to growing businesses and spur greater use of equity finance in small firms.”

The clause is a widely welcomed measure and one that I hope will have the unanimous support of the Committee, notwithstanding the tensions that exist.

Clause 53 - Relief for investments in social enterprises

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 20, in clause 53, page 44, line 29, at end insert—

‘(3) The Chancellor of the Exchequer shall, within six months of the passing of this Act, publish and lay before the House of Commons a report setting out the predicted impact, over the next five years, of the changes introduced by Schedule 9 to this Act to ITA 2007 on the overall level of investment in social enterprises.

(4) This report must in particular set out the predicted impact of sections 257MQ and 257MS of ITA 2007, as inserted by paragraph 1 of Schedule 9, on the overall level of investment in renewable technologies over the next five years.’.

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 9 be the Ninth schedule to the Bill.

That schedule 10 be the Tenth schedule to the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The tensions on the clause, the schedules and our probing amendment might be across the Committee rather than among Government Members.

Clause 53 introduces schedules 9 and 10, dealing with a range of income and capital gains tax reliefs to encourage individuals to invest in qualifying social enterprises. Eligible investments can be through share purchase or through certain types of debt. A social enterprise is defined as a

“community interest company, community benefit society or charity”.

It also provides that the definition can be extended by the Treasury in future, with retrospective effect. I am sure that the Minister will want to explain the Government’s thinking on that and in what circumstances they envisage extending the definition.

The schedules cite some specific trades to be exempted from receiving social investment tax relief. They include any company in receipt of feed-in tariffs, such as renewables obligation certificates, for the generation of electricity. I want to come back to that point in a moment, but it is worth noting that qualifying investments must be in companies with fewer than 500 full-time equivalent employees and with no more than £15 million in gross assets immediately before the investment and £16 million immediately after.

As is our pattern when we wish to probe the Government for further information, we have tabled an amendment to the clause that asks the Chancellor to produce a report that sets out the predicted impact of the changes over the next five years, with specific work on the potential for overall investment in renewable technologies. I want to make some comments and ask the Minister some questions. He may be able to give me some reassurance.

We recognise the value of social enterprises as a means of attracting investment and providing much-needed services to local communities; their benefits are well documented. However, along with the community benefits, we understand the level of commitment and involvement required in local communities to ensure that social enterprises succeed. Their business models need to work.

We have some questions about the scope and ambition of the social investment tax relief outlined in the Bill. The maximum investment is limited to £282,904 over three years. Will too many enterprises be ruled out by overly prescriptive eligibility criteria? We are also concerned about the danger that the provisions may be of more benefit to wealthy investors than social enterprises. Investors who choose to loan money to social enterprises have the option to charge interest on such loans, which would mean that they would benefit from not only tax relief on the loan as a qualifying investment but interest on their loan in the normal way.

One scenario has been suggested to me. I apologise in advance for going through it in detail, but it is important that the Minister can respond. If a top rate taxpayer was to lend a charity £200,000 at 10% interest with all capital repayable at the end of the three-year period, they would collect £60,000 in tax relief from SITR. They then give £80,000 to the charity under gift aid and collect £25,000 in higher rate tax relief. The charity collects £20,000 in gift aid. The lender receives £60,000 in interest on the loan at £20,000 a year. In total, the lender puts £280,000 into the charity and receives back £345,000—the £200,000 loan, £60,000 in interest and £85,000 in tax relief, which will give them a potential profit of some £65,000, which means that they will be better off than if they had simply used SITR. The charity receives £300,000 in loan, gift and tax relief, then repays £260,000 in loan and interest. It therefore makes a £40,000 profit and receives interest-free use of the money for three years. It has effectively borrowed money for three years at an interest rate of 13%.

Given the scale of potential profit for investors, it is possible that they could use SITR as a means of avoiding tax on their investments in an enterprise at little risk to themselves and with limited value to the enterprise in question. That is why we want to probe this issue further. The tax impact and information note perhaps tacitly admits some of those points, as it states that investors in such schemes

“tend to be male, located in the south of England and have higher overall income levels”.

Will the Minister respond to that?

I have further questions on that point. The Charity Tax Group has raised concerns that SITRs will be quite expensive to arrange and are most likely to be used by charities with an income of £1 million to £2 million. According to that estimate, many small-scheme social enterprises will be excluded.

We also note that there have been concerns expressed by others in the social economy sector that thousands of legitimate social enterprises—companies limited by guarantee that are not charities—will also be excluded. As I have mentioned, of particular concern is the impact of the clause on investment in the renewable energy sector. Proposed section 257MS explicitly rules out enterprises that benefit from Government renewable subsidies, including feed-in tariffs, renewables obligation certificates and the heat incentive scheme. Given the well publicised need for alternative sources of energy, is the Minister able to explain the rationale for that? There have been concerns that it could make investment in the sector difficult, potentially jeopardising the chances of meeting the renewable energy and climate change targets.

Can the Minister reassure us? For example, if funds had already been invested in renewable energy projects, would they have to be returned? Particular concern has been raised in relation to anaerobic digestion systems. More than £130 million of potential investment has been raised so far, but could that be lost? It will help if the Minister can respond to that. Can he give us a full explanation of the rationale behind excluding the enterprises in receipt of renewable subsidies, and how does he respond to those concerns regarding the potential impact of the clause on investment in the renewables sector and the ability to meet the climate change targets? Will he specifically address the concerns raised by the charitable organisations and social enterprises on the point that I have made about SITR being more likely to benefit wealthy investors than the organisations that they are investing in?

Finally, will the Minister tell us what efforts are being made to simplify SITR, given the concern that has been expressed that it can be overly complicated and expensive to arrange? If the Minister is able to reassure us on those points, I will be able to assess whether it is necessary to press the amendment to a vote.

David Gauke (Conservative, South West Hertfordshire)

Clause 53 introduces schedules 9 and 10, which provide for a new social investment tax relief. The scheme offers income tax and capital gains tax reliefs on sums invested by individuals in social enterprises. Many social enterprises currently have difficulty raising capital from investors and commercial lenders. The reliefs will support social enterprises seeking external finance by incentivising private individuals who invest in them.

I will provide a little background for the Committee. The Chancellor announced these reliefs in his 2013 Budget and consulted on them over the summer. Nearly 80 organisations and interested individuals responded. Taking on board their comments, we have modelled the reliefs on the existing enterprise investment scheme reliefs, but with significant differences to make them attractive to social enterprises and investors. An innovative feature of the new reliefs is that they will be available on investments that take the form of debt where the debt is unsecured. This will allow enterprises that are unable to issue shares to raise capital more readily.

I will set out the changes being made in schedules 9 and 10 respectively. Schedule 9 introduces a relief from income tax for individuals who make qualifying investments in qualifying social enterprises that are carrying on a trade with a social motivation. The relief takes the form of a deduction from income tax liability at a rate of 30% of the amount invested. Schedule 9 also defines what is meant by a social enterprise—community interest companies, certain community benefit societies and charities—and lists other conditions relating to size, structure and the activities to be carried on by the enterprise.

Schedule 10 introduces a relief and an exemption from capital gains tax, which complement the income tax relief in schedule 9 and closely resemble the capital gains tax reliefs available under the enterprise investment scheme. The chargeable gain on the disposal of any asset may be held over if an amount equal to the gain is invested in a social enterprise and the investment is eligible for the income tax relief. Tax will not be payable on the gain until the social enterprise investment is sold or repaid, or unless it ceases to qualify for the income tax relief. Even then, if there is a new eligible investment in a social enterprise, the gain may be held over once more.

As an extra incentive to investors, any gains on the social investment itself will not be charged to capital gains tax, where losses would be allowable losses. They will still be allowable, less or subject to restriction by the amount of tax relief previously given. The number of community interest companies has increased by 20% to 9,000 since the tax relief was announced in the Budget last year. The social enterprise sector estimates that the tax relief could lead to new capital of £480 million flowing into the sector over the next five years. We expect that figure to be slightly lower, to take into account the limit on the amount of tax-advantaged investment that each organisation can receive under EU state aid rules.

Amendment 20 would require the Exchequer to publish a report, within six months of Royal Assent, on the predicted impact over the next five years of the changes introduced by schedule 9. That is unnecessary. Until the tax relief is well established and investments are approved, we will have no better prediction than that provided by the sector. In the 2014 Budget, we announced that we would evaluate the impact of the relief in two years’ time to see whether it is having a transformative effect. In the next six months we will concentrate on promoting the relief and expanding the scheme so that it can make a difference. Surely, that is the right focus at the moment. We will be consulting stakeholders on how to expand the scheme, in particular by extending it to new forms of indirect investment, in the summer.

I appreciate that amendment 20 was tabled to elicit a debate, but I will attempt to address the concerns raised by the hon. Member for Kilmarnock and Loudoun. On the limits that are set out, the hon. Lady focused on gross assets but there is also a limit on employee numbers. We are in a fiscally constrained environment, and we want to encourage investment in organisations with the greatest market failure. Those are the smallest organisations. That is consistent with the EU approach and will help our application for a wider scheme. The presumption in the European Commission is that state aid is directed at small organisations most in need of assistance, and it will be looking for limits such as those, which are in place for venture capital tax reliefs.

In the autumn statement, we doubled the size of organisations that will be eligible for SITR, from fewer than 250 employees to fewer than 500. The vast majority of voluntary organisations will be eligible. The employee limit of 500 is, in particular, more generous than for the EIS, which has an employee limit of 250. The Government recognise that the employment intensity and funding challenges of the social enterprise sector are different from those of commercial organisations and that a higher employee limit is more appropriate for the social enterprise sector.

On the question of whether SITR is too complicated, HMRC will publish guidance and explanatory notes for organisations and offer an advance assurance scheme. We have learnt from the experience of EIS, on which the relief is modelled, that it needs to include tax avoidance clauses. We recognise that issue.

The hon. Member for Kilmarnock and Loudoun raised the point that, somehow, wealthy individuals will benefit, rather than charities and similar organisations. Social investment is a nascent market. The relief is designed to kick-start that market and bring in new investors, just as EIS has for risky commercial companies—hence our setting a similar rate of return. There will be no minimum investment, so the tax relief will be available for any size of investment. We expect crowdfunding to be a growing part of future social investment, so thousands of retail investors will potentially benefit. Charities and social enterprises will benefit from being able to borrow money more cheaply than would be possible otherwise. They will get a lower rate of interest than from a commercial lender—they would not seek SITR investment otherwise.

The hon. Lady gave the example of an investor using SITR and gift aid, but unless I missed this detail, she appears to have overlooked the fact that the investor in the scenario she described will be subject to higher rate tax on the interest received. Clearly that needs to be part of the equation.

The data in the impact assessment on who will invest and make use of the relief are pulled from historical data on the enterprise investment scheme and so are somewhat speculative. The Government will continue to monitor the take-up of social investment tax relief with a view to ensuring that it brings in genuine new sources of investment.

The hon. Lady highlighted the issue of changes to extend the scope with retrospective effect. The power to extend the scope exists to ensure that the legislation complies with our EU obligations, which do not allow member states to restrict the free movement of capital by restricting the scope of the measures to UK-only enterprises. Should the Government wish to extend the scope in future to overseas equivalents of community interest companies or community benefit societies, they can do so.

We have no intention of expanding the definition of those companies or organisations that can benefit. We acknowledge that a company limited by guarantee is a long-standing and common form for social enterprises, but do not wish to include other organisations that are not regulated by a body checking for a social purpose, as that would open up the scheme to the risk of abuse, which I know is a concern that all Members of the Committee will share. Setting up a new regulatory process for those organisations would duplicate the one already carried out by the regulator of community interest companies, which would not be good value for money for the taxpayer. Companies limited by guarantee that wish to take advantage of the relief can convert into community interest companies or community benefit societies for a nominal cost. As with other features of the relief, the Government will keep the situation under review to ensure that the relief is operating effectively.

On community energy schemes, it is worth pointing out that renewable energy schemes will receive £7.6 billion in subsidies in 2020, and in 2015-16 up to £430 million of taxpayers’ money will be used to subsidise renewable heating through the renewable heat incentive. Those figures include significant support for community energy schemes. Most such schemes will be too large to qualify for the social investment tax relief, but the Government will consider whether they should be eligible for the larger social investment tax relief, which requires notification to the EU. Part of the summer consultation exercise will be on how to provide a more consistently easy-to-follow approach. Some community schemes are eligible for tax relief under other tax-advantaged social capital schemes, such as SEIS, EIS and VCTs, including where they benefit from feed-in tariffs.

The Government are committed to ensuring that tax relief schemes are effective. The new social investment tax relief is not aimed at any specific social or community sector, and as part of its overall effectiveness it is important that it is not skewed towards one sector to the possible detriment of others.

This new relief on income tax and on capital gains tax will promote the growth and activity of the social enterprise sector by allowing qualifying businesses to access new sources of capital. It is the first tax relief of this kind or on this scale in the world. With these measures, the UK leads the way in supporting social enterprises as an effective and efficient way of delivering services and facilities for the benefit of us all. I therefore hope that the clause and schedules 9 and 10 stand part of the Bill, and that I have provided sufficient information to persuade the hon. Lady to withdraw her amendment.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the Minister for his response to the issues I raised. Of course, we welcome the support that will be given to the social enterprise sector and I have said how valuable that is to communities across the UK. I understand what he says in relation to the scope of our amendment and the point at which it would be reasonable and feasible to report back. I still have some concerns about the renewable energy sector and how that will impact on community energy schemes. However, it would be entirely possible to pursue those by other means rather than press the amendment at this point. I therefore beg to ask leave to withdraw the amendment.

Clause 54 - Relief on disposal of private residence

Shabana Mahmood (Labour, Birmingham, Ladywood)

The clause reduces, in most cases, the period for which an only or main residence automatically qualifies for final period exemption from 36 months to 18 months. The exception to that is individuals who are disabled or in a care home and who have no other property on which they can claim private residence relief. They will continue to get the 36-month final period exemption.

The stated policy objective is to make the tax system fairer by

“reducing the incentive for those with more than one property to exploit the rules while still providing people with sufficient time to sell a previous residence after moving to a new one.”

This measure would increase the capital gains tax liability for an individual who has two or more private residences at the same time for more than 18 months. Those affected by this change are likely to be wealthy individuals with more than one property.

We understand the thinking behind the clause and, of course, we do not want people to be able to effectively play the system and avoid paying capital gains tax artificially. We therefore support the thrust of the measures contained in the clause, but I seek clarification from the Minister on a number of points. He will be aware that the OTS, in its final report, said in relation to principal private residence:

“This relief is clearly of considerable importance and is itself a simplification on the basis that it keeps many taxpayers outside the CGT net. However, there has to be scope for simplification due to the numerous conditions and sub-reliefs causing complexity in anything other than straightforward cases. It is therefore proposed that these conditions be reviewed to test which are still appropriate, researched to see whether any can be streamlined and rewritten in a simpler format.”

I would be grateful for the Minister’s comments on the view taken by the OTS. After the clause is agreed today, does he intend to take on board some of what the OTS said, and if so, what is his proposed timetable for doing so?

I should be grateful if the Minister would set out the evidence base used to establish that 18 months is sufficient time for those who are genuinely trying to move home. I am concerned that there might be large regional variations in how long it takes people to sell their home. The expectation would be that sales take place in a shorter period of time in London and the south-east, where the housing market is much more buoyant, but 18 months might not be sufficient to sell in areas where it is less buoyant. What assessment has he made of those regional variations?

Some commentators have raised concerns about the definitions contained in the clause and, in particular, that the relaxation to 36 months only applies where a person is disabled or is a long-term resident in a care home at the date of disposal of the property. They fear that the “long-term resident in a care home” criterion is too restrictive. The low incomes tax reform group has suggested that instead of the current definition catching people who are long-term resident in a care home, it might be extended to include a long-term resident in a care home, respite accommodation, sheltered or very sheltered accommodation or those who, for reasons of old age or disability, choose to sell their homes and live with family or friends. The group makes the reasonable point that older or more vulnerable people do not often move into a care home straight away, but end up spending time in hospital, with family, in sheltered accommodation or short-term respite care first. It also suggests extending the definition of a disabled person to not only those in receipt of the relevant benefits, but those who might be eligible to receive them, as well as those who are suffering from a long-term chronic illness.

I understand the difficulties in capturing all those whom the exclusion to the new 18-month rule is intended to catch while still keeping the system simple, and I bear in mind the OTS’s comments that I quoted earlier, but will the Minister set out his views on the definitions that have been adopted by the legislation? Why has he rejected the wider definitions suggested by the low incomes tax reform group? Will he keep those matters under review as clause 54 beds in?

The Association of Taxation Technicians raised concerns about those who are moving to take up a new job and may lose out as a result of the proposed changes. It points out that people will often initially move into rental accommodation, perhaps to cover a probationary period until permanent appointment in their new job is confirmed. They may retain their former main residence as the only house that they own, so there is no question of their trying to exploit the rules and artificially avoid paying capital gains tax. They may only find a buyer and complete the sale of their house more than 18 months after they moved into rental accommodation. It does not seem the legislation’s intention that someone in those circumstances would be liable to capital gains tax. What should happen in those cases? Is the Minister concerned that there is a danger that the approach to counter unacceptable exploitation of the current laws might have been imprecisely targeted?

David Gauke (Conservative, South West Hertfordshire)

Clause 54 provides that where an individual owns a property that has at any time been their main home in the last 18 months, they will automatically qualify for relief from capital gains tax. That is reduced from the current position where the last three years qualify. Currently, if a person lives in a property as their principal private residence, no capital gains tax is due for that period or for certain allowed periods of non-residence. One of those allowed periods is the last three years of ownership, which is known as the final period. That was intended to deal with the scenario where an individual moves to a new house before the old one is sold and to give them time to sell it before capital gains tax starts to be due on it. However, some people are using the final period in a way that was never intended and getting up to three years’ relief on a property that they are not living in.

James Duddridge (Conservative, Rochford and Southend East)

I fully support the clause. I see it as a way of freeing up some housing stock that may otherwise be empty. Anecdotally, I have heard that affluent people that can afford to have two houses are keeping the first one right up to the end of that period to maximise the capital gain. Quite often that property is not let so it is left empty. Was that a driving force behind the clause?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes an interesting and important point. That may be one of the consequences of the clause, but I would not necessarily say it was the driving force behind it. It will certainly be interesting to see what the consequences will be. Whether it will help to free up housing capacity is a point that should not be dismissed, so I am grateful for his observation.

It is worth pointing out that the final period of relief was originally one year. It increased to two years in 1980 and to three years in 1991. It may be useful if I remind the Committee of what the then Member for Islington, South and Finsbury, Chris Smith, said in the 1991 Finance Bill Committee:

“In the current very flat housing market, the period of two years may be inadequate…Although that relief is not unreasonable where the house is left vacant during that period, especially when it is not appreciating much in value, relief becomes rather generous where the house is let before it is sold so that rental income will accrue as a result of the house being unoccupied by the owner or it is left deliberately vacant during a housing boom so that a much greater gain can be realised at a later date”.—[Official Report, Standing Committee B, 13 June 1991; c. 311.]

That point is not dissimilar to the one made by my hon. Friend the Member for Rochford and Southend East a moment ago. The then Financial Secretary to the Treasury, my right hon. Friend the Minister for the Cabinet Office and Paymaster General, agreed with that observation then and we agree with it now. The housing market is very different now compared to 1991. The current evidence shows that on average UK properties do not stay on the market long before they sell.

People have changed their behaviour to use the relief in ways that were not intended to be covered. Some people have taken unfair advantage of the final period by flipping their property to get relief on second homes—“flipping” is where a property owner buys a second home and nominates it as their private residence for a short time, with the express intention of securing private residence relief on it before they flip the nomination back to the first property. If they sell their second home within three years, none of the capital gain they make on the sale of the second investment property will be chargeable to tax. They also get near full relief on their main home and often full relief after deduction of a person’s annual exempt amount.

The Government support home ownership, but the three-year period is too generous and we are reducing it to 18 months. However, we recognise that not everyone will be aware when they leave their home that they may not be returning to it—such as when they go into hospital or respite care because of illness or injury. The decision to forgo the independence symbolised by living in one’s own home is not easy. The Government want to give people time to make that decision without fear of the possible capital gains tax consequences. The clause therefore maintains the final period of three years for people with disabilities and for anyone who is a long-term resident of a care home, when they sell their former home. The Government do not want to impact on anyone who is genuinely struggling to sell their home and we will keep this policy under review in the context of housing market trends.

Let me respond to the points made by the hon. Member for Birmingham, Ladywood, who asked why the Government have not sought to simplify private residence relief, as recommended by the Office of Tax Simplification. We continue to monitor the tax system and act when problems are identified. To be fair, the measure is not about reforming private residence relief as a whole. However, we wanted to act swiftly to address the worst abuses of the private residence relief. On the issue of whether 18 months is sufficient time for those who are genuinely trying to sell to move house, a wealth of data are publicly available on property market trends, including the time taken to sell. Officials looked at information on the average length of time to sell in a range of regions across the UK. They were informed by home.co.uk, the monthly national house price survey, and hometrack.co.uk. These indicate that people will be able to sell a property in the UK within 18 months. Those who cannot sell their home within 18 months are likely only to be liable for CGT on gains apportioned to a short period and the annual exempt amount may provide part or full relief on any gain on the property. Someone struggling to sell their home also has the option to rent it out. Lettings relief of up to a maximum of £40,000 may also be available to someone who lets out a property that is, or has been, their main residence.

In terms of the issues over where we have maintained the three-year period and whether the definition should be expanded to include those in hospice or respite care, the hon. Lady hinted at the answer.

On the question of where we have maintained the three-year period and whether the definition should be expanded to include those in hospice or respite care, the hon. Lady hinted that the answer was the potential complexity. It would be impractical to have a relief that allowed someone moving in with relatives to claim the longer final period, so it is fair that the relief is only for people with disabilities as defined in schedule 1A to the Finance Act 2005.

The word “disabled” is defined elsewhere in the tax code and making use of an existing definition ensures consistency and means that the definition is already understood by tax advisers. Introducing a new definition would add further complexity to the legislation. We keep all aspects of the tax system under review and we will act if there is evidence that people who are intended to benefit by the relief are being excluded.

On introducing a new definition of “care home”, there is no such definition in the tax code and no agreed definition in general use in the UK. To make the legislation easily understood, it was thought clearer to introduce the straightforward definition:

“an establishment that provides accommodation together with nursing or personal care”.

That means exactly what it says. It includes people with disabilities in respite care, but to include sheltered housing would be difficult as there is no legislative definition.

It is worth pointing out that there is a separate relief when someone has been absent from a property for work, and the proposals make no changes to those rules. They allow a person to receive up to four years’ relief in addition to the final period if they cannot live in their main residence because they are employed elsewhere, providing they do not nominate a new main residence during the time and they return to the property after they are required to work away from home. It is useful to note that those who are required to work abroad may still be able to benefit from the full private residence relief as long as they return to the same property when they are no longer required to work broad.

With that clarification, I hope the Committee is satisfied that the clause strikes the right balance between providing people with sufficient time to sell their home after leaving it while reducing the incentive to take advantage of the rules, and I hope the clause can stand part of the Bill.

Clause 55 - Remittance basis and split year treatment

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 55 makes a technical change to amend an error in the Finance Act 2013. It ensures that when the split year treatment applies, no capital gains tax is charged in respect of gains made by a remittance basis user during the overseas part of the split year. Currently, the opposite is the case and capital gains tax is charged due to a mistake in the 2013 Act.

The split year treatment was introduced from 6 April 2013 and allows a tax year to be split into two parts in eight specific circumstances. The split year treatment means that someone can be treated as a UK resident for only part of a tax year if they leave or arrive in the UK part of the way through a tax year. The remittance basis allows someone who is not a UK domiciliary to choose to have their non-UK income and gains taxed in the UK only to the extent that they are brought into or enjoyed in the UK. Therefore, income and gains made abroad and left abroad are called unremitted income and gains.

I have three short questions for the Minister. When and how did he become aware of the error in the legislation, how many people will be affected by the change, and what is the expected impact on the Exchequer?

David Gauke (Conservative, South West Hertfordshire)

Clause 55 makes a small change to ensure that the remittance basis works as intended in respect of gains arising during the overseas part of a split year of residence. Schedule 45 to the Finance Act 2013 introduced a new statutory residence test for individuals. It also introduced the concept of a split year of residence previously in extra-statutory concessions so that a year in which a person arrives in or leaves the UK is split into a UK part and an overseas part. That required amendments to a lot of existing legislation. One of those amendments was not quite right and resulted in gains arising in the overseas part of a year but remitted in the UK in part of that year, or in a subsequent period of UK residence, being charged to tax. Such gains would not be charged in the hands of a taxpayer assessed on the arising basis of taxation. The remittance basis is a deferral of the taxations of gains until they are remitted; it should not create a charge to tax that would not otherwise arise. The clause would correct that error and is backdated to 6 April 2013, so that the charging of gains on the remittance basis excludes gains arising in the overseas part of a split year.

The changes made by the clause will ensure that gains arising in the overseas part of a split year for a remittance basis taxpayer are not taxable. That is the same position that applies to any other taxpayer. The change will preserve the integrity of the tax system. Only remittance basis taxpayers who realise gains in the overseas part of a year and remit the gains while UK-resident will be affected. There is negligible cost, as it was never intended that such gains should be charged.

The error crept into the change to the remittance basis rules for capital gains that was inserted into section 12 of the Taxation of Chargeable Gains Act 1992 by paragraph 95 of schedule 45 to the Finance Act 2013. Despite extensive consultation, the error was not spotted until after the 2013 Act received Royal Assent. In fact, it was drawn to the attention of officials in autumn 2013.

It is not known many people will be affected by the measure, but it is unlikely to be many given the nature of the error. I hope that those points of clarification help the Committee and that this technical clause stands part of the Bill.

Clause 56 - Termination of life interest and death of life tenant: disabled persons

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss clause 284 stand part.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 56 will extend the capital gains tax upper limit provisions that apply on a death of a vulnerable beneficiary and extend the range of vulnerable beneficiary trusts that qualify for special income tax, capital gains tax and inheritance tax treatment. That will enable more vulnerable people to have their property safeguarded for their benefit within a trust, while ensuring that it is not taxed more adversely than if it were owned by the individuals themselves.

Clause 284 will, from 6 April 2014, extend the definition of a disabled person that is used in relation to trusts with a vulnerable beneficiary to include those in receipt of the mobility component of disability living allowance at the higher rate, or the mobility component of the personal independence payment at either the standard or enhanced rate. By way of background, a beneficiary is anyone who benefits from a trust. A vulnerable beneficiary is either a person who is mentally or physically disabled, or someone under 18—a relevant minor—who has lost a parent through death.

Capital gains tax is a tax on the gain in the value of assets, such as shares, buildings or land. A trust may have to pay capital gains tax if assets are sold, given away or exchanged and their value has increased since being put into the trust. The trust will have to pay the tax only if the assets have increased in value above a certain allowance known as the annual exempt amount.

Trustees are responsible for paying any capital gains tax that is due. They can claim a relief, which is calculated in a similar way to income tax relief, in that they work out what they would ordinarily have paid if there were no relief and then work out what the beneficiary would have to pay if the gains arose directly to them as individuals. They can claim the difference between those two amounts as a relief on what they have to pay in capital gains tax. The special capital gains tax treatment does not apply in the tax year when the beneficiary dies.

I have some questions for the Minister. Last year’s Finance Bill made a number of changes to vulnerable beneficiary trusts. I am interested to know why the introduction of a capital gains tax uplift for trust assets on the death of a vulnerable beneficiary was not included in the Finance Act 2013 and is instead being introduced now.

What estimate has the Minister made of the current number of trusts with vulnerable beneficiaries? Do the Government agree with the low incomes tax reform group that the current meaning of “disabled person” could be expanded further to bring more disabled beneficiaries within the scope of the legislation, as we have just discussed in relation to clause 54? For example, it could include those who are vulnerable, yet not eligible; those with fluctuating or early-stage symptoms of mental incapacity; those with addictions; and those in abusive relationships. Will the Government consider consulting on that point?

David Gauke (Conservative, South West Hertfordshire)

No doubt the Committee is excited by the fact that we are debating clause 284. That excitement is tempered only by the fact that we are also debating clause 56 and there is a long way between the two. Clauses 56 and 284 both relate to trusts established for a person with a disability, and I am grateful to the Opposition for agreeing that they be debated together. Clause 56 extends the special capital gains tax provisions that apply on the death of the beneficiary of a qualifying disabled person trust. Clause 284 extends the special tax rules more generally by widening the meaning of “disabled person” for tax purposes. That extended definition will also apply, irrespective of whether there is a trust, in determining whether a person qualifies for the capital gains tax private residence relief final period exemption of three years when they sell their former home, which we debated under clause 54 a moment or so ago.

By way of background, I should say that trusts can be a sensible way to manage the property of a person who is unable to manage their own affairs. Such trusts are recognised in the tax system under long-standing rules. In essence, they allow any tax liabilities to be calculated as though they had arisen on the beneficiary rather than on the trustees. The rules, however, are limited to trusts set up for bereaved minors or certain persons with a disability—those who cannot manage their affairs because of a mental disorder, or who are in receipt of welfare payments in respect of their care needs.

Last year, in consequence of the welfare reform changes, we extended the definition of “disabled person” to include those in receipt of the daily living component of the new personal independence payment. However, we were encouraged to go further. Those representing vulnerable members of society argue that the rules should also include trusts established for those who, while able to manage their own affairs, may be at risk of abuse or exploitation if left to manage their own property, a trust being a sensible way to protect their property. The then Economic Secretary to the Treasury, now the Secretary of State for Culture, Media and Sport, assured last year’s Finance Bill Committee that we were more than happy to have further discussions with stakeholders on potential future changes to the rules relating to those trusts and how they could be practically achieved.

After careful consideration, we agree that the rules should be extended. Clause 284 extends the meaning of “disabled person” to include those in receipt of welfare payments in respect of their mobility needs—either the mobility component of disability living allowance at the higher rate or the mobility component of the personal independence payment at the standard or enhanced rate. We were also encouraged to look at a specific anomaly within the capital gains tax provisions that apply on death. The general principle of the death provisions is to take unrealised gains accrued up to the date of death out of the charge to capital gains tax when a person dies, thereby ensuring that the gains are not subject to double taxation under capital gains tax and inheritance tax.

Assets held in a qualifying disabled person trust are not subject to the normal periodic inheritance tax charges that apply to trusts. Instead, they are treated as if they were held outright by the beneficiary. As such, they are potentially subject to inheritance tax when that person dies. It follows, therefore, that the capital gains tax death provisions should also apply to gains accrued in that type of trust. The current rules do ensure that, but in a limited way. They apply only to one form of qualifying disabled person trust, which is those where the beneficiary has what is known as an “interest in possession” in the trust—essentially, an entitlement to the trust income. That restriction is distorting decisions on whether to establish a trust and the most appropriate trust structure to use. I am grateful to the organisations representing those with disabilities or those who care for them; they brought the anomaly to our attention and we are pleased to be able to take action.

The changes made by clause 56 will remove that restriction by extending the death provisions to all forms of qualifying disabled person trusts. They will have effect in relation to deaths occurring on or after 5 December 2013, the date when we announced the change.

The hon. Member for Birmingham, Ladywood asked how many vulnerable beneficiary trusts are likely to be affected. We are unable to assess that accurately because there is no central record. As to vulnerability and the reason why people who do not claim benefits, such as those suffering abuse, are not included in the definition, we have sought to draw a balance between making provision for those most in need and over-complicating the tax system. However, we will of course keep matters under review.

I was asked why the CGT death uplift anomaly was not corrected before now. It is true that it is of long standing. We listened carefully to recent representations about it and decided to act. Last year we focused on changes necessary as a result of welfare reform, but we have used the opportunity this year to address this particular point, and I hope the Committee welcomes that.

Clauses 56 and 284 will make the tax regime for trusts that are established for the benefit of a person with a disability more tax-neutral—that is, nearer to a regime in which tax neither penalises nor encourages their use in preference to the person holding the same property outright.

Clause 57 - Capital gains roll-over relief: relevant classes of assets

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 57 is a technical amendment in relation to capital gains tax roll-over relief on business assets. Essentially, it is possible to defer capital gains tax when a qualifying business asset is sold, and to reinvest the proceeds in a replacement qualifying business asset. The clause updates the list of qualifying assets following a change in the EU rules affecting one type of EU agricultural subsidy. It will ensure that farmers are not disadvantaged by changes to the EU’s agricultural subsidy scheme.

What discussions has the Minister had with farmers about the change? Will he confirm that no additional changes will be required following the changes to EU rules that have prompted the clause? How will farmers be made sufficiently familiar with the change? Will there be an additional administrative burden on farming businesses, and if so, how big does the Minister expect that burden to be?

David Gauke (Conservative, South West Hertfordshire)

As we have heard, clause 57 extends the list of assets that are eligible for capital gains tax roll-over relief. Roll-over relief allows capital gains tax to be deferred where the proceeds of disposing of certain qualifying assets are reinvested in new qualifying assets. That helps businesses to modernise and expand.

The list of qualifying assets has included payment entitlements under the European Union’s main agricultural subsidy scheme, the single payment scheme, since its introduction in 2005. However, under reform of the common agricultural policy, payments under the single payment scheme will cease at the end of 2014, with subsidies paid in future under a new scheme—the basic payment scheme.

The changes being made under clause 57 will include payment entitlements under the new basic payment scheme within the list of assets eligible for roll-over relief. About 11,000 farmers transfer single payment scheme entitlements each year, typically with the transfer of agricultural land, and a similar number of transfers of basic payment scheme entitlements is expected to take place. It is perhaps worth pointing out that about 8,000 farmers out of 105,000 English single payment scheme applicants transfer entitlements permanently each year in England. In Scotland the number of permanent transfers is 450 out of 19,000 applicants. In Northern Ireland and Wales it is in both cases in the region of 1,200, out of 38,000 and 16,000 respectively. Similar numbers of transfers of basic payment scheme entitlements are expected once the scheme is fully established. I hope that is helpful in informing the Committee of how many farmers will see an impact from this measure.

With regard to ensuring that farmers know about the changes, detailed discussions have not taken place with farmers. HMRC is considering the implications of the changes and will discuss them with representative bodies in future. On how a person can get basic payment scheme entitlement, in England, where entitlements are already at a flat rate in each region, existing single payment scheme entitlements will automatically become basic payment scheme entitlements on 1 January 2015. In other parts of the UK, where the value of entitlements currently varies, they will be allocated to farmers who apply to the scheme. No additional changes to the CGT rules are required in response to the EU changes to the subsidy scheme.

I hope that those points of clarification are helpful. Clause 57 can ensure that farmers are not disadvantaged by the changes to the European Union’s agricultural subsidy scheme.

Clause 58 - Capital gains roll-over relief: intangible fixed assets

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 58 is another rewrite to correct a tax law error, such as the one we discussed in connection with clause 55. In this case the error appears to have gone unnoticed for a lot longer—five years after the original legislation was passed. The clause concerns roll-over relief on the disposal of tangible assets, where the proceeds are reinvested in replacement and tangible fixed assets. A tangible asset includes both fixed assets, such as machinery, buildings and land, and current assets such as inventory. An intangible asset covers not only intellectual property, such as patents, copyrights, trade marks and know-how, but a variety of other assets with commercial value, such as agricultural quotas, payment entitlements under the single payment scheme for farmers, franchises and telecommunication rights.

The intent behind the law, which we support, was to deny roll-over relief in those circumstances, but a drafting mistake in the tax law rewrite in 2009 appears inadvertently to have reinstated the relief. The effect of the clause is to make clear in law that roll-over relief is not available on such transactions. As I mentioned earlier, it has taken five years for this to come to notice. I am interested to know when the Minister was made aware of the need for the change and whether it only recently came to light. How many companies have taken advantage of this error in law? Has there been any loss to the Exchequer as a result? Will the Minister tell the Committee whether there are any current court cases going through the tax tribunal system that might be affected by the measures in clause 58?

David Gauke (Conservative, South West Hertfordshire)

Clause 58, as we have heard, corrects an error in legislation rewritten in 2009, arising from the tax law rewrite project. The changes made by clause 58 ensure that companies are not able to claim capital gains roll-over relief where the proceeds from the disposal of a tangible asset, such as a property, are reinvested in an asset taxed under the intangible fixed asset rules. Intangible fixed assets include goodwill and certain types of intellectual property such as trade marks, patents, design and copyright. The clause also ensures that there can be no double relief given on or after 19 March 2014 for earlier claims. It does so by taking into account any roll-over relief already given when calculating future relief under the intangible fixed asset rules.

Let me briefly set out some background. The Finance Act 2002 introduced a new tax regime from 1 April 2002 for companies’ intangible fixed assets. The new treatment generally follows the accounting treatment rather than treating them like other capital assets. Capital gains roll-over relief was withdrawn where the proceeds from a disposal of assets charged as a capital gain were reinvested in intangible fixed assets acquired on or after 1 April 2002.

The roll-over provisions were partly rewritten in 2009 as part of the tax law rewrite project. Regrettably, it has now come to light that the rewritten provisions contain an error and could be interpreted as undoing the 2002 provision dealing with roll-over relief. That interpretation is not only incorrect but contrary to the intentions of Parliament, so we are taking steps to put matters right. Changes made by clause 58 are effective from 19 March 2014, the date on which HMRC published the draft legislation. The clause corrects the drafting error in the capital gains roll-over relief provision to prevent future claims and restore the legislation to what was intended by Parliament. Clause 58 also amends the intangible fixed asset rules to ensure that where roll-over relief has been given in error, the amount of relief is taken into account when companies claim future relief under the intangible assets rules, which will prevent double tax relief from being given from 19 March 2014.

The clause is not expected to have any wider economic impact. Very few companies are known to be affected by the change, because most have operated the rules as Parliament intended. HMRC is aware of one case in which roll-over relief has been claimed contrary to the rule that existed before 2009.

Shabana Mahmood rose—

David Gauke (Conservative, South West Hertfordshire)

I will give way in a moment. There are no court cases as yet; HMRC has challenged that one known case, but the matter has not yet gone to court. I give way to the hon. Lady.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The Minister has answered my question.

David Gauke (Conservative, South West Hertfordshire)

Excellent. On the question of how the error arose, HMRC was made aware of it only at the beginning of 2014. There is no cost to the Exchequer because HMRC is challenging the interpretation in the one case that I have mentioned.

Clause 59 - Avoidance involving losses

Shabana Mahmood (Labour, Birmingham, Ladywood)

The clause amends the targeted anti-avoidance rules in sections 184G and 184H of the Taxation of Chargeable Gains Act 1992 on the use of capital losses to shelter income profit. A capital loss is incurred when a capital asset, investment or real estate, decreases in value. That loss is not realised until the asset is sold for a price lower than the original purchase price. The intention is to put it beyond doubt that the rule includes arrangements involving derivative contracts and other financial products.

The clause clarifies the operation of one of the chargeable gains targeted anti-avoidance rules. It confirms that the rule applies generally to the contrived use of capital losses to reduce income profits, by whatever means, and it will affect companies that use avoidance schemes that involve claims for relief for capital losses against gains arising on derivative contracts and other financial products. This is primarily seen as a technical change, but I am interested that it is not expected to have an Exchequer impact. I should have thought that some revenue to the Exchequer that is under threat, or is being lost, will now be protected. It would be helpful if the Minister explained why there is a negligible impact on the Exchequer, as evidenced by the tax information and impact note. Will he also explain what gave rise to the view that the targeted anti-avoidance rule needed clarification? Was there case law that went in the wrong direction, or is there something of which HMRC became aware through another route?

David Gauke (Conservative, South West Hertfordshire)

As we have heard, the clause makes changes to an anti-avoidance rule that restricts the use of capital losses by companies. The changes make it clear that the rule applies to all artificial arrangements in which a chargeable gain accrues.

In normal circumstances, companies are able to offset capital losses only against capital gains. In the past, many and varied avoidance schemes were devised to get around that principle and use capital losses in arrangements against income profits. There is therefore a targeted anti-avoidance rule specifically to counter schemes that misuse capital losses to shelter income profits. The rule applies subject to a number of express conditions. In particular, there are references to a company accruing a gain on a “disposal,” and to incurring “expenditure” or receiving a “receipt” related to the gain.

HMRC has become aware of artificial arrangements whereby it is argued that the targeted anti-avoidance rule does not apply. If that were so, the rule would not be effective in ensuring that a company’s capital losses are used only to relieve chargeable gains. The changes will amend the conditions under which the anti-avoidance rule applies. There will no longer be any reference to disposals, and it is made clear that, for the purpose of the rule, the terms “receipt” and “expenditure” have broad application. The changes will put it beyond doubt that the rule applies to all arrangements designed to offset capital losses against income profits.

On the yield and revenue protection, the existing rule has generally been effective in discouraging avoidance through such schemes. HMRC has been made aware of some potential challenges to the rule, and the changes are intended to pre-empt any attempt to implement those challenges and to make it clear that such arrangements will not get around the rule. HMRC estimates that up to £500 million of tax will be at risk in the first year should the challenges succeed. HMRC would need to rely on the general anti-abuse rule to prevent the loss of that tax, which may be successful.

We want to ensure that existing legislation is effective in achieving its purpose, and the changes do that. It is possible that the arrangements of which HMRC has become aware are sufficiently abusive for the general anti-abuse provision to apply, and there is therefore no anticipated revenue yield. Indeed, the revenue may have been protected by the general anti-abuse rule. We have made it clear, however, that the general anti-abuse rule does not replace targeted anti-avoidance rules that address avoidance in specific parts of the tax system, which is why we are making these changes. The clause is part of the Government’s determination to address avoidance, which is bearing considerable fruit. The clause will ensure that the anti-avoidance rule that restricts the use of capital losses by companies works as intended, and I hope it may stand part of the Bill.

Clause 60 - Extension of capital allowances

Shabana Mahmood (Labour, Birmingham, Ladywood)

The clause gives the Treasury the power to extend, by Treasury order, the duration of four 100% first-year capital allowances—the enhanced capital allowance schemes. Those are expenditure on cars with low carbon dioxide emissions; expenditure on zero-emission goods vehicles; expenditure on plant or machinery for gas refuelling stations; and expenditure on plant and machinery for use in designated assisted areas. The clause also extends the fourth ECA scheme for expenditure on plant and machinery for use in designated assisted areas—namely, enterprise zones—which is due to expire on 31 March 2017, for an additional three years to 31 March 2020. In effect, therefore, if someone buys equipment that qualifies, they can write off 100% of the cost against that year’s taxable profits.

We introduced the ECA schemes in 2001 and we support them. In addition, one of the enterprise zones affected by the measure is in my constituency, and I welcome that, too. On enterprise zones, will the Minister explain what the anticipated cost is of expanding the ECA scheme for the additional three years? What level of take-up is the Minister expecting of that ECA scheme in those different enterprise zones? What impact assessment has been made on businesses that are ineligible for ECA due to their location outside an enterprise zone? What impact assessment has been made on the effectiveness of the ECA scheme on the growth of small businesses in those designated areas?

On the other three ECA schemes affected by the clause, what is the Government’s expectation of the impact on incentivising businesses to invest in cars with the lowest carbon emissions? How much progress do the Government expect will be made towards helping businesses to reduce their carbon emissions and encourage a shift to cleaner goods vehicles?

David Gauke (Conservative, South West Hertfordshire)

Clause 60, as we have heard, extends the enhanced capital allowance scheme in enterprise zones by three years. Currently, a company must invest in a designated site by 31 March 2017 in order to claim enhanced capital allowances. The clause extends that period, so companies will be eligible provided that they invest before 31 March 2020. It also enables the Government to extend the ECA scheme, and those applying to low-emission cars, zero-emission goods vehicles and gas refuelling stations, through statutory instrument, rather than primary legislation in future. That will mean that Finance Bill space will not be required to implement such measures, saving parliamentary time—although possibly disappointing some members of the Committee.

The enterprise zones introduced by the Government are supporting regional growth. So far, enterprise zones have created more than 9,000 jobs and have attracted more than £1.2 billion of private sector investment. To give just one example, the Committee will welcome the announcement made by Siemens in March that it would invest £160 million in the Humber enterprise zone. A further £150 million will be invested by Associated British Ports in the Green Port Hull development. That combined investment will create 1,000 jobs directly. We want to see the success continue; that is why we are extending the financial incentives offered in enterprise zones for a further three years.

Enhanced capital allowances in enterprise zones allow businesses locating on designated ECA sites to claim a 100% allowance on investments made in new plant and machinery. There are currently seven enterprise zones in England with enhanced capital allowance sites—in the black country, the Humber, Liverpool, London, the north-east, Sheffield and the Tees valley. The scheme is designed to support very large, capital-intensive investments, which can take several years to finalise. Extending the end date of the scheme to 2020 will give the local enterprise partnerships that run enterprise zones more scope to land major investments.

The extension to the deadline for ECAs in enterprise zones will also apply to the three zones in Scotland and the three zones in Wales, which offer ECAs in addition to incentives in the gift of the Scottish Government and the Welsh Government. As well as extending enhanced capital allowances, we announced at the Budget that business rate discounts in enterprise zones will also be extended by three years. We will legislate for that separately in the Non-Domestic Rating (Rates Retention) Regulations.

Ian Swales (Liberal Democrat, Redcar)

As an MP with one of the enterprise zones to which the Minister referred in my constituency, I can certainly bear out the need for the extension. For example, we are currently working on an investment wherein, if a spade was put in the ground tomorrow, the project would take four years to complete. I therefore very much welcome the change.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend for his intervention. I know that he provides a strong voice for businesses in Redcar and does a great deal of work to ensure that his local economy is successful.

I was asked about the cost to the Exchequer, and can assure the Committee that the measure is not expected to have Exchequer impact. In terms of the impact assessment for ineligible businesses, it is too early to say. On the level of take-up and the effectiveness of the schemes in encouraging SMEs in the use of low-carbon transport, again, it is too early to say exactly as tax returns for 2012-13 have only just been submitted and have yet to be analysed by HMRC.

It is worth pointing out that we are seeing significant investment on ECA sites. For example, Vantec, a subsidiary of Nissan, recently opened a new logistics centre in the north-east enterprise zone. That £240 million investment is part of the local supply chain for Nissan and will create 230 jobs. Air Products is currently nearing completion on the construction of its first energy-from-waste facility in the Tees Valley enterprise zone, with which I know my hon. Friend will be familiar. It broke ground on a second plant in the enterprise zone in April this year. The first plant will secure 50 new jobs and employ 700 construction workers.

I hope that those points are helpful to the Committee and that the clause can stand part of the Bill.

Clause 61 - Business premises renovation allowances

Shabana Mahmood (Labour, Birmingham, Ladywood)

I beg to move amendment 21, in clause 61, page 52, line 41, at end insert—

(a) the Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, undertake a review of the impact of changes made by this section on—

(i) the uptake of the business premises renovation allowances (BPRA);

(ii) the number of BPRA schemes disclosed through DOTAS being investigated by HMRC; and

(iii) the value of BPRA schemes disclosed through DOTAS being investigated by HMRC.

(b) the Chancellor of the Exchequer must publish the report of the review and lay the report before the House.’.

Gary Streeter (Conservative, South West Devon)

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

Shabana Mahmood (Labour, Birmingham, Ladywood)

Amendment 21 is intended as a probing amendment, and I would like to explain to the Committee what clarification we are seeking from the Minister in his response.

The express purpose of the business premises renovation allowance is to provide an incentive to bring derelict or unused business properties back to use in the form of an initial allowance of 100% for expenditure on converting or renovating unused properties in disadvantaged areas and bringing them back into use. Clause 61 does two things: it provides for amendments to business premises renovation allowances in order to clarify the expenditure that qualifies for relief; and it reduces the balancing adjustment period from seven to five years.

In terms of the amendments to qualifying expenditure, the clause clarifies that expenditure is incurred on the conversion or renovation of a qualifying building into qualifying business premises. Expenditure is incurred on certain types of work: building works, architectural or design services, surveying or engineering services, planning applications, and statutory fees or permissions.

Expenditure on fixtures is defined at an extraordinary level of detail, with the clause clarifying that qualifying expenditure includes: automatic control systems for opening and closing doors, windows and vents; window cleaning installations; fitted cupboards and blinds; protective installations such as lightning protection, sprinklers and other equipment for containing or fighting fires; and much more.

The clause also clarifies that expenditure must be at market value on a building that has not been used in the past 12 months, and must be on works that are completed within 36 months. If a person who has submitted a tax return becomes aware that their return has become incorrect in that regard, they must tell HMRC. The clause also confirms that the allowance fully complies with state aid rules. In relation to the balancing, it says that where qualifying expenditure has been incurred on a qualifying building and a balancing event occurs within five years, a balancing adjustment must be made. That limit was previously seven years.

Let me give some background. In July 2013 it was reported that HMRC had recently received a number of DOTAS disclosures—disclosures of tax avoidance schemes—involving business premises renovation allowances that exhibited features that had been part of avoidance schemes that HMRC had challenged in the past. The technical note states that

“broadly the schemes contain a varying balance of genuine expenditure on actual regeneration and some features that have elements of artificiality, possibly aimed at ramping-up qualifying expenditure and accelerating tax relief in ways that could be regarded as inappropriate.”

HMRC launched a technical review in July 2013 and asked for comments by 30 September 2013. The main areas of concern were about what constituted qualifying expenditure, the use of limited-recourse, often circular borrowing arrangements designed to increase the amount of expenditure that is claimed, and timing issues.

The Government gave their response to the consultation and decided on the approach that would be taken. They concluded that a number of the problems identified by HMRC could be dealt with by clarifying the expenditure that qualifies for the allowances, as I detailed earlier. That would mean that there was no need, according to the Government, for a targeted anti-avoidance rule.

Broadly, we agree that this is the right way forward. It is important that action is taken to close down what appears to have become a significant loophole that, if not dealt with, could drain income away from the Exchequer. However, there are a number of matters that I would like to clarify.

Proposed new subsection (2C) states:

“Condition B is treated as met in respect of expenditure incurred on matters not mentioned in that Condition to the extent that that expenditure (in total) does not exceed 5% of the qualifying expenditure incurred on the matters mentioned in subsection (2B)(a) to (c).”

Condition B

“is that the expenditure is incurred on—

(a) building works,

(b) architectural or design services,

(c) surveying or engineering services,

(d) planning applications, or

(e) statutory fees or statutory permissions.”

However, one of the key problems, it has been suggested, with the original legislation is a lack of precision. Indeed, the Government state in paragraph 3.8 of their response that they have

“decided to amend the existing legislation to make the scope of the relief more certain in its application.”

However, new subsection (2C) seems to fly in the face of that and I fear that it might open up the door again for abuse, so I should be grateful if the Minister would explain the thinking behind new subsection (2C) and how he can be sure that this will not be used for tax avoidance. I note that the Government, in their response, indicate that the 5% is for associated activities such as project management. The Minister will, I hope, see that, as the provision is drafted, there is scope for concern that it might lead to other avoidance measures.

It would be good to know more detail about how many DOTAS disclosures were made involving business premises renovation allowances with features that were part of avoidance schemes that HMRC had challenged in the past. How many were there and what features did they display? It would be useful to know that, so that we can assess when the loophole has been successfully tackled.

As I said at the outset, given the lengthy clauses tabled by the Government on these issues and the level of abuse that HMRC surmises has occurred, we have tabled a probing amendment, seeking a review, to try to get greater clarification. We want to be clear that this clause deals with what is a very real problem and that those claiming the allowance are doing so within the spirit of the legislation and the intention of Parliament in enacting it. Just a short internet search on my part suggested that the construction of some of the schemes means that the allowance can be worth many millions of pounds. If it is abused, that is clearly a very real risk to the Exchequer. We all want to ensure that derelict buildings are brought back into use in deprived areas and that it is not used as a tool by those who are just bent on avoiding tax.

I should be grateful for the Minister’s clarification on those points.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, the clause makes various changes to the business premises renovation allowance that ensure that only the actual direct costs of bringing unused business premises back into business use are relieved and that where tax relief has been claimed up front, the related works are completed within a reasonable time. BPRA is designed to aid the regeneration of the UK’s most economically disadvantaged areas. It provides a 100% tax relief for the direct costs incurred by a business in converting or renovating premises left empty for at least a year, in order to bring such premises back into productive use. The property must be located in an assisted area of the UK.

Many areas have benefited from BPRA to date, improving both the properties involved and local job prospects. However, the existing BPRA rules do not clearly define the expenditure that qualifies for relief, nor do they require future renovation works on which tax relief has been claimed up front to be completed within a set period. That has led to the development of tax avoidance schemes that seek to exploit those weaknesses: for example, tax relief has been claimed for indirect costs such as financing or promoter’s fees, or for works that will not be started for many years—furniture has even been screwed to the floor to qualify for relief. That situation cannot continue. To ensure protection for the Exchequer and to maintain fairness for taxpayers, last July a review set out the Government’s concerns and proposed counter-measures. The changes introduced by the clause flow from that review and consultation.

The main changes made by the clause clarify that relief is available only for the actual building works and certain listed fixtures. Certain specified activities, such as architectural and surveying services, will also qualify for relief. In addition, unspecified activities directly connected to the works, such as project management services, can also qualify for relief limited to 5% of the costs. The existing rule that prevents tax relief from being claimed before a building has been unused for a year will also be clarified, as some parties have said that that is ambiguous. That will prevent BPRA claims on properties that have only recently become unused that are then left empty for a year before renovation works commence simply to qualify for relief.

Where expenditure is paid and tax relief claimed in advance of the works being carried out, a new condition requires the works to be completed within 36 months. Any relief claimed on works not completed within that period must be repaid. That provides an incentive, taking account of reasonable building schedules, for works to be completed as soon as possible rather than for the funds to lie idle, which will ensure that local areas benefit from BPRA as soon as possible.

The period for which the completed building must be owned once available for letting will be reduced from seven to five years. That acknowledges concerns expressed during the consultation that the present seven- year period can make it difficult to attract bank finance. Finally, to ensure that BPRA complies with state aid rules that limit the total value of aid that can be ordered to an individual project, we are introducing a condition that ensures that BPRA cannot be claimed where another form of state aid has been received.

The Government held useful consultations with representative bodies, advisers and other interested parties about the proposals. I thank them for their valuable input in that process, which led to some of the original proposals being modified to meet concerns expressed. For example, where tax relief has already been claimed, the time limit in which the works must be completed was extended from the proposed 12 months to 36 months. That recognises the challenges encountered in refurbishing old properties, and listed buildings in particular. The legislation also allows for a wider range of fixtures to qualify for relief than was originally proposed.

On the question whether the definition used in proposed new section 2C is exact enough, BPRA aims to offer relief on the cost of project management services provided to co-ordinate building works. In some BPRA schemes, the project management role can be much wider and include attracting tenants or marketing the property to investors, which are not allowed expenditure. To focus the relief on managing the building works, allowable costs have been limited to 5% of the total costs of those works, which is considered to be in line with commercial rates for such activities.

The legislation does not prevent more than 5% being charged, but only a sum that relates to direct building works can be relieved. HMRC will also examine claims to see whether they are realistic.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and schedules) - Clause 61 - Business premises renovation allowances

Martin Caton (Labour, Gower)

I remind the Committee that with this we are discussing clause 61 stand part.

At 11.25 am, the Minister had not quite finished, so I call him to conclude his remarks.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to welcome you back to the Chair this afternoon, Mr Caton. As you say, I had not quite managed to complete my remarks on clause 61 regarding business premises renovation allowances.

When we were interrupted, I was responding to the question from the hon. Member for Birmingham, Ladywood (Shabana Mahmood) about whether the definition used in proposed new subsection (2C) to section 360B of the Capital Allowances Act 2001 is exact enough. I was making the point that BPRA aim to offer relief on the cost of project management services provided to co-ordinate building works. In some BPRA schemes, the project management role can be much wider and can include attracting tenants or marketing the property to investors, which are not allowable expenditure. To focus the relief on managing the building works, allowable costs have been limited to 5% of the total cost of those works, which is considered to be in line with commercial rates for such activities. The legislation does not prevent more than 5% from being charged, but only a sum that relates to direct building works can be relieved. Her Majesty’s Revenue and Customs will also examine claims to check whether they are realistic.

The hon. Lady also made a point about how many disclosures of tax avoidance schemes there have been in relation to BPRA. In 2011-12 there were 19; the same number in 2012-13 and 13 in 2013-14. During the period 2007 to 2011 there were 11 such disclosures. I have combined those years to ensure that individual schemes cannot be identified.

I shall quickly address amendment 21. It asks that the Chancellor, within six months of the Act receiving Royal Assent, undertakes a review of the impact of changes made by the clause. While the Government keep all tax policy under review, there is limited merit in conducting an evaluation in the way the amendment suggests. There are also a number of obstacles that mean it would not be possible. HMRC will not have the relevant data to conduct such an evaluation for another year. It is also worth pointing out that BPRA is due to end in April 2017 and a review of its effectiveness, based on the available data, will be carried out in the preceding year in line with the normal tax policy making practice. I think the hon. Lady said it was a probing amendment. I hope on that basis that I can persuade her not to press it to a vote.

Finally, clause 61 ensures that BPRA continues to benefit the most disadvantaged areas in the UK while preventing abuse by confirming its original intentions. That is the balance that we have to strike in terms of BPRA, the point made by the hon. Lady earlier. I believe we are striking that balance. I ask that the amendment be withdrawn and hope that that clause can start part of the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

It is a pleasure to welcome you back to the chair, Mr Caton. I am grateful to the Minister for his comments on the clause, particularly his explanation of the definitions used in new subsection (2C). We need to keep a watching brief on this area to ensure that it is not open to the abuse we have seen in the past, which we hope the clause will remedy. I beg to ask leave to withdraw the amendment.

Clause 62 - Mineral extraction allowances: expenditure on planning permission

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 62 aligns mineral extraction allowances with the existing principles of plant and machinery allowances. In Budget 2013 the Government announced that they would consult on proposals to align the treatment of assets for mineral extraction allowances with that for assets eligible for plant and machinery allowances where profits were not subject to UK tax. This confirms that MEA allowances can only be used for activities that fall under the ambit of British taxation. It will prevent UK taxable profits from being reduced by offsetting activities that are not subject to British tax.

The changes to the legislation confirm that for the purposes of MEAs, a mineral extraction trade consists of an activity that is within the charge to UK tax. It also confirms that the activity of an exempt foreign permanent establishment is treated as a separate mineral extraction trade for the purposes of MEAs and aligns the treatment of MEAs with the existing principles for plant and machinery allowances. It further confirms that notional allowances will be given automatically in calculating the profit or losses of the exempt FPE as if the exempt FPE were within the charge to UK tax.

The tax information impact note tells us that the measure will affect a small subset of companies in the FPE regime that carry on a mineral extraction trade. What is the size of this subset? How many companies are carrying out the mineral extraction works that would be caught by the clause? The note tells us that the measure will be incorporated within routine IT and guidance changes. How long will it take for that to happen? How regularly will those routine changes in HMRC take place? Could the Minister set out the nature of the exempt FPE regime and tell us how many companies are involved?

David Gauke (Conservative, South West Hertfordshire)

As we have heard, the clause makes changes to the treatment of mineral extraction allowances where the mineral extraction activity enters or ceases to be within the charge to UK tax. The changes ensure that the treatment of MEAs is certain and consistent between businesses and aligns with the existing treatment for plant and machinery capital allowances. The changes also confirm that a mineral extraction trade consists of an activity that is within the charge to UK tax and that MEAs are available only in respect of activities that are within the charge to UK tax.

The Government announced at Budget 2013 that they would consult informally on their proposals to align, under the foreign branch exemption rules, the treatment of assets eligible for MEAs with the treatment of assets eligible for plant and machinery allowances. Section 18A of the Corporation Tax Act 2009 allows a company to elect for the profits and losses of its FPEs to be excluded from the calculation of profits chargeable to UK tax. There are specific rules for plant and machinery capital allowances that deal with FPEs, but there are no corresponding rules for MEAs.

As the Committee will be aware, capital allowances are made available in respect of capital expenditure on the provision of plant and machinery for the purposes of qualifying activities. The activities of a company are qualifying activities for capital allowance purposes only to the extent that profits or gains from the activity are chargeable to UK tax.

The clause amends the Capital Allowances Act 2001: to confirm that, for the purposes of MEAs, a mineral extraction trade consists of activity that is within the charge to UK tax; to provide for the activity of an exempt FPE to be treated as a separate mineral extraction trade for the purposes of MEAs; to introduce transitional rules for MEAs similar to those for plant and machinery allowances so that, where a disposal value is required to be brought into account, it will not, in most cases, give rise to a balancing allowance or balancing charge when a company elects into FPE exemption; and to stipulate that notional capital allowances are given automatically when calculating the profits or losses attributable to the FPE, as if it were within the charge to UK tax.

The clause will affect a small number of companies with MEAs in relation to foreign branches that choose to make FPE exemption elections. The companies most likely to be affected are mainly those in the oil and gas sector. There were only two responses to the Government’s informal consultation on the proposed changes that closed on 20 September 2013. Both responses recognised the need for the proposed changes and raised some technical points that were considered when finalising the clause’s detailed provisions. Since the draft legislation was published with the autumn statement on 5 December 2013, there have been no representations from companies or their advisers suggesting that any changes to the clause are needed.

I have no information on the size of company subset, as companies in the oil and gas sector may have overseas operations. In answer to how long it will take HMRC to adapt and update the guidance, the guidance will be published in October 2014. I hope that information is helpful. As I said earlier, a small number of companies with MEAs in relation to foreign branches that choose to make FPE exemption elections will be affected by the change. Those companies are likely to be in the oil and gas sector, but I cannot be any more specific. I hope the hon. Lady finds that answer helpful.

In conclusion, the clause brings the treatment of MEAs into line with the existing rules for plant and machinery allowances and confirms that MEAs are only available in respect of activities within the charge to UK tax. I hope the clause will stand part of the Bill.

Clause 63 - Mineral extraction allowances: expenditure on planning permission

Shabana Mahmood (Labour, Birmingham, Ladywood)

As we discussed in relation to clause 62, companies involved in extracting deposits from the earth—for example, sand, gravel, oil, hard rock or geothermal energy—can claim mineral extraction allowances. MEAs are available, first, for mineral exploration and access expenditures at 25%, but that is broadly all expenditures up to first production from a source. If a company gets to the point of planning permission but does not then get it, it can get relief at the rate of 25%. Secondly, MEAs are available if a company is successful in its planning application, at which point it is deemed to have acquired a mineral asset and the relief is levelled at 10%. The clause means that, if planning permission is granted, the expenditure attracts the higher 25% rate of relief, therefore aligning the treatment of successful and unsuccessful applications because the costs of a successful planning application will now be treated as expenditure on mineral exploration and access, rather than on acquiring a mineral asset.

I have a few questions for the Minister. It would be helpful if she could set out the rationale for the previous differential treatment of the two types of application and expenditure, and the reason for them now being aligned. What representations did she receive which persuaded her to make that change? It would be helpful if she would explain how many companies are active in this area and will now avail themselves of the change made.

Nicky Morgan (Conservative, Loughborough)

It is a pleasure to serve under your chairmanship, Mr Caton. I thank the hon. Member for Birmingham, Ladywood for her comments.

The clause makes changes to the treatment of costs associated with successful planning permission for the purposes of mineral extraction allowances. The changes ensure that costs incurred by the mineral extraction industry on successful planning permission are treated as expenditure on mineral exploration access, rather than expenditure on acquiring a mineral asset. This accelerates the tax relief available to companies in respect of these costs. It is expected to facilitate investment in the mineral extractives industry.

Mineral extraction allowances give extractive companies relief on two types of cost. The first is costs associated with mineral exploration access. These costs attract MEAs at a written down value of 25% per year, or 100% in the first year for oil and gas companies. The second is costs associated with acquiring a mineral asset. These costs attract MEAs at 10%. Companies can get quicker relief on costs associated with exploration and access than on acquiring a mineral asset. Under existing legislation, successful planning and permitting costs are treated as costs associated with acquiring a mineral asset, so they receive slower relief. However, in many cases successful planning permission will not give companies a right to the mineral asset. In a case of onshore oil and gas, for example, rights over the minerals are only granted through a separate licence from the Department of Energy and Climate Change. Planning permission gives companies the right only to access the minerals. It is therefore right that successful planning permission costs are treated as a cost associated with exploration access and receive quicker relief. That is consistent with the current treatment of costs associated with unsuccessful planning applications.

The hon. Lady asked about the change and the rationale for the previous treatment. That was an inconsistency pointed out by those in the industry and, once companies had highlighted that inconsistency, we acted quickly in cases where we agreed with their assessment. She will understand that Her Majesty’s Treasury receives representations from a number of different companies across the spectrum. In terms of how many businesses will be affected by the measure, it is not possible to say with any certainty as planning costs are incurred at the outset of projects, so it is difficult to know how many will come to fruition.

I hope I have explained the purpose of the clause, which is to amend the existing legislation to ensure that all costs incurred in obtaining planning permission for the purposes of a mineral extraction trade qualify for relief at the higher rate.

Clause 64 - Extended ring fence expenditure supplement for onshore activities

Martin Caton (Labour, Gower)

With this it will be convenient to discuss the following:

That schedule 11 be the Eleventh schedule to the Bill.

Amendment 22, in clause 65, page 55, line 36, at end insert—

‘(1) The Chancellor of the Exchequer shall, within three months of Royal Assent, undertake a review of the impact of the creation of the onshore allowance introduced under this section.

(2) The report referred to in subsection (1) above must in particular examine—

(a) the estimated total loss of tax revenue to the Treasury in the next 10 financial years;

(b) the impact on onshore oil and gas exploration and field development in the next 10 years; and

(c) the differential impact on individual shale fields.

(3) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.’.

Clause 65 stand part.

That schedule 12 be the Twelfth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 64 and schedule 11 amend the Corporation Tax Act 2010 to extend from six to 10 the number of accounting periods for which a company can claim ring fence expenditure supplement in relation to qualifying expenditure or losses from onshore oil and gas activity. As the oil and gas trade is subject to high start-up costs and a relatively lengthy period of likely unprofitability, the supplement currently allows both onshore and offshore companies operating inside the oil and gas ring fence to lift their ring fence losses—or, in the period before their trading, their qualifying pre-commencement expenditure —by 10% for up to six accounting periods to maintain their time value until they can be offset against future profits. Clause 64 and schedule 11 extend the ring fence period to up to 10 accounting periods, but only for onshore activity because, to quote the tax information impact note:

“The early development of projects for shale gas and other onshore hydrocarbons is expected to have longer payback periods than offshore hydrocarbon projects and to be dominated by companies which do not have existing ring fence profits against which to set their expenditure. Extending the number of accounting periods for which these companies can claim RFES allows them to maintain the value of their expenditure for longer to recognise the extended period before they are able to utilise those amounts.”

The Government have said that they expect the measure to support companies involved in the exploration and appraisal of onshore oil and gas projects. However, the tax information impact note makes it clear that it is expected to have nil Exchequer impact over the period 2013-14 to 2018-19, and states:

“Only a small number of UK businesses will be affected by the measure. This measure is expected to have a negligible impact on these businesses.”

It would be helpful if the Minister indicated the number of businesses that will benefit from the measure and how many jobs may be created or supported as a direct result of its introduction, given that HMRC believes it will have a negligible impact. I am sure that it will have undertaken an assessment of that impact, however negligible.

I turn to amendment 22 and clause 65. The Government intend the clause to support the onshore oil and gas industry through the exploration phase and into development. If exploration establishes the commercial viability of the UK’s onshore oil and gas resources, there could be significant longer-term increases in domestic production of hydrocarbons, which would increase energy security, create jobs and bring benefits to the UK supply chain. Clause 65 and schedule 12 will replace existing field allowances for onshore oil and gas projects with a new onshore allowance, which will exempt a portion of profits made from such projects from the supplementary charge.

As Committee members will know, in addition to the ring-fenced corporation tax, which is set at 30% for profits of more than £1.5 million, oil and gas companies are subject to an additional tax—a supplementary charge—on adjusted ring-fenced profits, which is set at 32%. Field allowances provide relief by reducing the amount of adjusted profits on which the supplementary charge is due for both onshore and offshore oil and gas projects that meet certain conditions, thereby significantly reducing the effective tax rate on that portion of eligible onshore projects from 62% to 30%.

Before I outline the Opposition’s significant concerns about the measure and speak to amendment 22, I want to give the context of our wider position on onshore gas projects, or shale gas exploration and extraction through hydraulic fracturing—more commonly known as fracking. The Opposition’s approach to shale gas is to foster a mature debate, adhere to our climate change commitments and ensure that fracking takes place only in a robust and appropriate regulatory environment that provides safeguards for local communities, with local consent after legitimate environmental concerns have been properly addressed. Gas has a role to play, alongside renewables, nuclear, and carbon capture and storage, in the future balanced energy mix, which should be as low carbon as possible without endangering our energy security.

With 80% of homes reliant on gas for heating and in the context of declining North sea production, shale gas may have a positive impact on our energy security. However, we have been clear that shale gas cannot come at the expense of our long-term climate change commitments. Indeed, the Opposition have pledged that a future Labour Government would introduce a 2030 decarbonisation target as soon as possible after coming to office, committing the Government to a target for the effective decarbonisation of the power generation sector and setting out the long-term direction of Government policy.

Charlie Elphicke (Conservative, Dover)

Does the hon. Lady accept that shale gas could make a contribution to decarbonisation, because gas produces half the amount of carbon dioxide as other fossil fuels such as petrol, diesel and coal?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I will come to those points. I have made clear that we accept that gas has a role to play as part of a balanced energy mix, but the benefits of fracking have been somewhat overstated. I will explain why that is our position. A future Labour Government would ensure that the development of shale gas in the UK went hand in hand with support for carbon capture and storage projects, which we believe to be the key to a long-term future of fossil fuels as part of our energy mix.

Charlie Elphicke (Conservative, Dover)

Can the hon. Lady name more than two successful carbon capture and storage projects in the world today?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

That is the very point we are debating. There has to be support for carbon capture and storage if we are going to realise the benefits.

Chris Williamson (Labour, Derby North)

I wonder whether the nation, and indeed the world, would be further forward were it not for the fact that when the coalition came to office it cancelled the carbon capture and storage power projects that were on the stocks prior to the election.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank my hon. Friend, because as we debate these clauses it is important that we put into context some of the concerns surrounding shale gas exploration.

Christopher Pincher (Conservative, Tamworth)

I am grateful to the hon. Lady for giving way again. She has been very kind. She said that the development of shale gas, which is an issue of energy security, must go hand in hand with the green agenda. She suggested carbon capture and storage as a way forward. What further expenditure does she believe is necessary to build the carbon capture and storage environment in the UK?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I believe you would rule me out of order, Mr Caton, if we were to turn this into a debate on carbon capture and storage. The Labour party has clearly set out that we believe there needs to be a balanced approach to the energy debate. That stands in contrast to the coalition’s approach to energy, particularly that of the Conservatives, who appear—this is backed up by the rather frantic contribution from Conservative Members today—to have settled on fracking as a panacea to all our energy concerns, whether energy security or ever-increasing domestic and business energy bills. That has led to Ministers repeatedly overstating the potential benefits of a new and relatively untested technology and, of course, the measure introduced by clause 65.

Christopher Pincher (Conservative, Tamworth)

Can the hon. Lady tell the Committee where this technology has been “untested”?

Catherine McKinnell rose—

Nicky Morgan (Conservative, Loughborough)

The US?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister mentions the US. I will explain why we are concerned about direct comparisons with the US, which seem to contribute to the overstating of the Government’s position.

Shale gas is simply not the cheap, abundant, immediately available silver bullet that the Government would like it to be and often suggest it is.

James Duddridge (Conservative, Rochford and Southend East)

I thank the hon. Lady for giving way; she is being most generous and I will try not to be too frenetic or overly excitable. Has she seen the report from the other place on this subject, which was produced by a cross-party group? It was very supportive and said that we should move faster on this issue.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the hon. Gentleman for his non-frantic contribution to the debate. I have seen the report that he refers to. I do not want the Committee to misunderstand the argument that we are putting forward, because we have said that we welcome fracking as part of the solution to a mixed and balanced energy security for this country. However, we wish to highlight our concerns about the Government’s approach on this issue.

The Minister of State, Department of Energy and Climate Change, the right hon. Member for Sevenoaks (Michael Fallon), has spoken about some 20 to 40 exploration wells being drilled in the UK in the next two to three years. Many industry commentators indicate that we are likely to see just one to two wells at most by the end of this year. Indeed, an Ernst and Young report commissioned by the United Kingdom Onshore Operators Group, which was published just last month and for which the Energy Minister provided the foreword, made it clear that this is no imminent revolution, with shale gas production unlikely to get going until 2020 and peak production not expected to be reached until a decade from now, in 2024. The EY report also stated:

“It is not yet possible to make any forecast of potential recovery rates”,

because although we know that the gas is in the ground, we do not know how much of it is extractable. Shale gas is, therefore, a significant unknown and not a certain proposition.

Christopher Pincher (Conservative, Tamworth)

The hon. Lady says that shale gas is “a significant unknown”. Does she not think that her amendment will only make it even more difficult to extract shale gas and explore for it, and therefore make it even more unknown? It seems that she supports shale gas on the one hand and yet does not support it on the other.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

No, I do not agree, because our view is that there needs to be a balanced debate that is fully informed, and we will take a reasonable, rational and honest approach to it. Our amendment seeks to assist the Government in that end.

Of course, the Government have been particularly keen to emphasise the jobs potential created by shale gas exploration and production. The Opposition welcome the development of highly skilled employment. However, we are again concerned about the over-optimistic promises being made by Ministers. Just in January, the Prime Minister predicted that shale gas would develop some 74,000 jobs, citing a May 2013 study by the Institute of Directors that was funded by the firm Cuadrilla. However, an independent strategic environmental assessment undertaken by AMEC and commissioned by the Department of Energy and Climate Change concluded that the next licensing round for shale gas could deliver

“16,000-32,000 full time equivalent…positions”

in the peak development phase,

“including direct, indirect and induced jobs”.

Even if the Government extended their model to include the current licence sites, the job creation estimate would still be 10,000 to 25,000 fewer than the figures predicted by the Prime Minister.

Of course, the over-optimism does not stop there. We all know the Government are desperately keen to find an answer to the ever-increasing domestic and business energy crisis, and little wonder after household energy bills have increased by more than £300 since 2010, while a typical small business has seen its energy bills rise by more than £13,000 in the same period. So we have repeatedly heard the Prime Minister, Chancellor and Energy Minister propagating one of the most pervasive myths about fracking, namely that it will deliver significantly cheaper bills. Indeed, the tax and information impact note for clauses 64 and 65 suggests that any increase in shale gas production resulting from those measures would contribute to the security of the UK’s energy supply and has the potential to lower bills for households and businesses.

Charlie Elphicke (Conservative, Dover)

Will the hon. Lady give way?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I was going to explain, but if the hon. Gentleman would like to intervene before that, he can do so.

Charlie Elphicke (Conservative, Dover)

I thank the hon. Lady. The point is that a lot of our energy is from resources outside this country and is part of the global market, where this country cannot control price fluctuations. When energy is home-grown, this country is much more able to control price fluctuations, particularly if that energy is bountiful, because that helps to drive down the cost. Surely hard-working people and their families deserve to have lower electricity, gas and energy bills.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Indeed, but the concern is that the Government’s analysis is based on experience in the USA, which has seen lower bills as a result of fracking. The Government make a simplistic extrapolation from the US experience, which is just not valid in the UK context. Lower prices for domestic consumers and businesses in the US have in part been because the US is not able to export gas. As supply increases in a closed market, the cost correspondingly decreases. In contrast, the UK is well connected to the European gas network and any cost-reducing benefits of an increase in supply will be shared with the rest of the continent, dissipating the impact, particularly as extra-European demand for gas is likely to increase.

Iain McKenzie (Labour, Inverclyde)

Could it be a coincidence that we see certain energy companies moving away from offshore wind projects and hydro projects towards fracking, which they see as an easier and cheaper opportunity to make a quick buck? Fracking has been encouraged in the tax system, which has led to the companies putting aside all other green projects.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

There is a real worry that if we put all our eggs in one basket and believe that fracking is the silver bullet to solve many of our concerns about the cost and supply of energy, we will, to our detriment, not have a broader, more balanced approach to renewable energy production and other forms of energy production along with fracked gas.

Ian Swales (Liberal Democrat, Redcar)

I am listening carefully to what the hon. Lady is saying. So far, I have not heard her mention energy security. Is she comfortable with the fact that her party’s potential Government would rely on gas supplies through Ukraine for longer than would be the case under the current Government’s policy?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I have very much mentioned energy security, and it is one reason why the Government support the moves towards fracking, where it is in the correct, safe and properly considered method.

To return to the point I was making about the Government’s over-optimism, the geography of the two countries is completely different and makes exploration less likely in the UK. Many areas of the US where production takes place are largely deserted. Despite what the Chancellor’s father-in-law, Lord Howell, might like to think about the “desolate” north-east or north-west—whichever it is—the UK is a much more densely populated environment. That will affect the exploration and extraction permissions that local authorities grant.

Ian Mearns (Labour, Gateshead)

I do not claim to be an expert on fracking, but I do know that when Lord Howell described the “desolate” north-east as an appropriate place for fracking, he could not have been more wrong. Both geographically and geologically, the north-east is regarded as a low-yield area. I think that he meant the north-west, and corrected himself the next day by saying that his comments about the “desolate” north-east should have been about the north-west. It is worth making that point for the record.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend makes an important point, because there are significant geological distinctions that make the UK very different from the US. UK shale is also considered to be thicker than that in the US, which makes extraction harder.

Mike Kane (Labour, Wythenshawe and Sale East)

If Lord Howell meant to refer to the north-west, does that mean that there is a strong possibility that there will be fracking in his son-in-law’s constituency of Tatton?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend raises an important prospect. I have a map of the part of the UK that seems to be the most likely given its potential yield. It does not seem to be broken down by constituency, but it is worth a closer look.

Nicholas Riley of the British Geological Survey commented that

“faulting and changes in the rock type both vertically and horizontally”

mean that the fuel pools are more separated in the UK. The US Energy Information Agency explained that that is why the UK’s

“drilling and completion costs for shale wells are substantially higher”

than in north America. In other words, believing that the US experience of fracking, including lower energy bills, can simply be replicated in this country is misguided. That view is shared by many experts, including Lord Stern, the author of the review on the financial implications of climate change and the chair of the Grantham research institute on climate change and the environment at the London School of Economics. He commented:

“It's a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics.”

Christopher Pincher (Conservative, Tamworth)

I am grateful to the hon. Lady for giving way again; she is being very generous. She mentioned the British Geological Survey. Is she aware that when it gave evidence to the Energy and Climate Change Committee it made it clear that the 15% extraction rate of the total pool of shale gas that may be available to us in the UK could give us 60 years’ worth of gas supply? Does that not conflict with the points that she is making in relation to her concerns about shale gas?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The point is that there is a lot of conflicting information out there and a lot of uncertainty surrounding it. That is the reason for the amendment. To give a tax relief without a greater level of understanding of what the potential yields, implications and geological consequences of fracking might be is a questionable approach.

Christopher Pincher (Conservative, Tamworth)

I am grateful to the hon. Lady. I promise it will be my last intervention, unless I hear something else that requires an intervention. She has mentioned her amendment and she said earlier that there is an expectation that there will be minimal exploration drilling in the next year or two, and therefore minimal extraction. Why is it necessary to undertake an examination of the estimated total loss of tax revenue to the Treasury when, by her own admission in her earlier remarks, such revenue will be negligible, if she is right?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

That is very much the purpose of the amendment. We need to look at exactly why the Government are giving a tax incentive when their own tax information and impact note states that its impact will be negligible. The Government need to answer that question. Our amendment asks for an estimated total of the tax revenue that is due to be lost over the next 10 years, and it asks about the impact on exploration, because there does not seem to be any assessment of what the impact on exploration will be and what impact it will have on field development over the next 10 years. We want a little more transparency from the Government in relation to the potential impacts.

I can see that Government Back Benchers are interested in the subject. I am sure they would support greater transparency from the Government as to what their intentions are and what their assessments are of the impact of the tax incentive that is being granted in the Bill.

Charlie Elphicke (Conservative, Dover)

I have proposals in my constituency for underground coal gasification, and shale and underground gas exploration. The hon. Lady supports underground coal gasification in her area in her constituency. It is important that we look at working cross-party on how to bring forward these new technologies on a bipartisan basis, rather than going on about how it is bad because we want to keep the green vote. There is a real issue about energy security in this land, and the Labour party should be more constructive and more embracing of how we deal with these issues for the long-term future of our whole nation.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I think the hon. Gentleman is sincere in his comments but cynical about what the Opposition are putting forward. We are putting forward concerns that are held up and down the country by members of the public about the level of uncertainty and unknowns on this subject. All we are asking for is a bit of transparency and proper assessment of the impacts that these changes will have.

I return to those experts who agree that it is not possible to extrapolate the US experience and apply it to the UK and get the same results. Bloomberg New Energy Finance stated:

“Exploitation of the UK’s significant shale gas resources is unlikely to result in low natural gas prices. The cost of shale gas extraction in the UK is likely to be significantly higher than in the US, and the rate of exploitation insufficient to offset the decline in conventional gas production, meaning market prices will continue to be set by imported gas.”

DECC’s own chief scientific adviser Professor David MacKay concluded:

“Because the UK is well connected to the Western European gas market, the effect of UK shale gas production on gas prices is likely to be small.”

So despite all the serious concerns that I have outlined about the Government’s over-optimism about the benefits of fracking, the Chancellor decided to offer, through clause 65, a very generous tax concession to shale gas operators, in the mistaken belief that fracking offers the answers to all of our energy problems. It would appear that Government Back Benchers share his absolute belief.

Although the Minister might argue that such tax incentives are required to stimulate the new market dealing with a number of unknowns, such as size, recoverability of resources and the regulatory framework, the Opposition strongly believe that it is precisely those issues, including environmental and safety concerns, that need to be clarified before there is any consideration of advantageous tax treatment for this sector.

As my hon. Friend the Member for Rutherglen and Hamilton West (Tom Greatrex) commented in his capacity as shadow Energy Minister,

“Announcing community benefits and tax breaks before we know how much shale gas is actually recoverable, or before anyone even has a licence to extract it, is typical of a Government that seems prepared to accept fracking at any cost.”

The Opposition simply do not accept that any substantive case has been made for the type of blanket tax break being offered by clause 65, especially when there remain such unknowns about the commercial viability of fracking in the UK context. Marginal field allowances granted for offshore activity in the North sea are an exception rather than the rule, and are given on the basis of commercial viability in relation to specific fields where conditions mean that costs are higher than in other fields.

The generous and blanket tax reduction being proposed by clause 65 is quite different. In that context amendment 22 calls on the Chancellor to undertake a proper review of the likely impact of the measures introduced by clause 65. It is an entirely reasonable amendment and one that all Committee members should be prepared and keen to support, as we believe that it is only right to be fully aware of the likely impact of this generous, blanket tax break for the shale gas sector;

If the Minister is not prepared to back the amendment, the Committee would benefit from her addressing some of the issues that have been raised. Although the tax information and impact note suggests clause 65 will have a net Exchequer impact of £45 million between now and 2018-19, could the Minister estimate the total loss of tax revenue to the Treasury in the next 10 financial years as a result of this measure? What specific impact does she expect clause 65 to have on onshore oil and gas exploration, in terms of increased investment and activity?

Does she, like the Energy Minister, expect to see between 20 and 40 exploration wells being drilled in the UK in the next two to three years? Could she clarify how many jobs the Government currently expect to be created as result of the shale gas industry? Could she outline the evidence base for the claims repeatedly made by the Prime Minister, Chancellor and Energy Minister that fracking in the UK will lead to lower energy prices for domestic and business consumers?

Given that the blanket measure apparently came as a complete surprise to the industry on its announcement, could the Minister confirm what representations the Government received, and from whom, for this measure to be introduced? Finally, in this context, will the Minister comment on the likely impact on the shale gas sector of not proceeding with the clause?

Iain McKenzie (Labour, Inverclyde)

It is a pleasure to serve under your chairmanship again, Mr Caton. We are discussing a tax cut for a particularly contentious and challenged method of gas extraction. Because the Government are slashing in half the tax that the energy industry would pay, it may look on the surface as though they are saying that it may frack at any cost.

My previous intervention was about the impact on green industries and green generation. The public are aware of opportunities to produce energy other than fracking up and down the country, if indeed that is allowed to take place: we have been made aware that there will be no extraction in certain areas. Two such green projects in my area have been shelved by energy companies, because—it is no coincidence—they are now looking to fracking as a cheaper alternative to get into the energy market. One project for wind energy off Tiree, which Scottish Power had expressed interest in and for which it was looking at obtaining a licence, has been shelved. The construction of such offshore wind generators would have brought many jobs to my constituency. Some hydro projects have now also been shelved. Again, it is significant that that those decisions came at such a time.

The public remain unconvinced that fracking is a way forward. We have absolutely no idea, and the Government cannot say with any certainty, how much gas down there will be recoverable through this process and, as my hon. Friend the Member for Newcastle upon Tyne North said, we do not even know if anyone has a licence for that, yet the Government seem happy to halve the tax to encourage companies to step forward. Only when the public have confidence that the environmental issues have been looked at and when they have some idea of the amount of gas that can be extracted will they move towards supporting this method of energy retrieval. There are real dangers for the other, green industries from fracking.

Ian Mearns (Labour, Gateshead)

In a nutshell, I had the pleasure last Friday of visiting Rettig, a large manufacturer of radiators in my constituency that took over Myson. It is one of the largest manufacturers of radiators in the country. From the horse’s mouth, the managing director—without me prompting him at all—told me that, from his perspective, the Government’s green deal has been an unmitigated failure.

Iain McKenzie (Labour, Inverclyde)

I agree wholeheartedly that the Government’s green deal has been an absolute disaster. The uptake figures further emphasise that. We do not want to sacrifice the other, green industries by giving this massive tax cut to promote and encourage fracking. It is wrong that this industry should be given a pre-emptive tax cut. We ask for our amendment to be supported.

Chris Williamson (Labour, Derby North)

It is a pleasure to serve under your chairmanship again, Mr Caton. My hon. Friend the Member for Newcastle upon Tyne North said that Labour’s proposed amendment is reasonable and I entirely agree. In fact, I would go further. The amendment is not only reasonable, but essential for the future of our energy infrastructure. We heard a lot in the run up to the previous general election about the Conservative party changing its persona and somehow embracing the green agenda. However, the truth will out. The Prime Minister was reported as saying to his advisers last year that they needed to get rid of “the green crap.”

This measure is an example of the Prime Minister’s wishes being brought to fruition. It is also important, for the record, to acknowledge that in the Budget the Chancellor did his level best to ensure that investment in the green renewable energy sector was all but eliminated, and that is regrettable. The Committee heard various flurried interventions from Government Members about their concern for energy security. If they were genuinely concerned about energy security, surely they would have protested about a proposal from the Chancellor that effectively kills off a meaningful future for the renewable energy sector?

Chris Heaton-Harris (Conservative, Daventry)

I would hate to think that the hon. Gentleman’s statements were not based on facts, so I thought I would read a fact out. Is he aware of a written ministerial statement yesterday confirming that in December 2013, consent was given for more onshore wind farms with more megawattage—I do not really agree with this, but alas, this is the case—than in any previous month in the United Kingdom?

Chris Williamson (Labour, Derby North)

It is interesting that the hon. Gentleman is trying to rescue his party’s reputation, which is torn and tattered. It is widely reported that experts in the field are saying that the UK is virtually a no-go area for investment in the renewable sector due to the Government’s approach to the whole issue. If Government Members were genuinely concerned about energy security, they would be doing more to promote the renewable energy sector, not, for example, completely undermining solar energy by chopping and changing the feed-in tariff regime.

Duncan Hames (Liberal Democrat, Chippenham)

If the hon. Gentleman is concerned about there being an appetite for solar power, he should visit Wiltshire, where there are numerous applications under way. Why would any energy company be interested in raising finance to invest in new electricity generating capacity when a prospective Government are committed to freezing the company’s prices and preventing it deriving a return on that investment?

Chris Williamson (Labour, Derby North)

There speaks a Liberal Democrat who is clearly under the control of his Conservative masters. Opposition Members will never defend the interests of big corporate concerns that are ripping off consumers. I am proud of the future Labour Government’s commitment to freezing energy prices. Hard-pressed consumers are being ripped off by the energy utilities in the United Kingdom. It is instructive and interesting to hear a Liberal Democrat stand up for the big six energy companies which are blatantly ripping off the British consumer.

Chris Evans (Labour, Islwyn)

Does my hon. Friend agree with Lord Lawson, who told The Times that Britain “doesn’t have an energy policy” at all? The Times in its editorial said:

“the coalition energy policy is a tangle of regulations, subsidies and incentives. There is delay in investment, driving up prices over the long term and making blackouts a real possibility by as soon as next year.”

Chris Williamson (Labour, Derby North)

I am grateful to my hon. Friend—I could not have put it better myself.

In response to the comment that the Labour party was somehow trying to shore up its green flank, Government Members should be aware that Labour’s record on the environment is second to none. I remind the Committee that the Climate Change Act 2008 was introduced by a Labour Government. I must take exception when Government Members refer to their concerns about energy security not only because of the manner in which they are undermining renewable energy in this country, but because it was a Conservative Government who decimated the coal industry in this country—[Interruption.] Government Members may laugh, but there are hundreds of years of coal reserves under our feet. It is no coincidence that when this coalition came to power, it cancelled—[Interruption.]

Martin Caton (Labour, Gower)

Order. I need to be able to hear the speakers. We should return to the clause and amendments that are under discussion.

Chris Williamson (Labour, Derby North)

I will, Mr Caton, but, to finish my point, it is no coincidence that the coalition cancelled the four demonstration carbon capture and storage projects that were on the stocks prior to the election.

My other point on energy security is that 50 million tonnes of coal were imported into the United Kingdom last year, so coal is clearly still an important part of the mix. If we are genuinely and seriously concerned about energy security, which we should be, in particular given events in Ukraine, we need to consider all the available options and not rush headlong into a potential environmental catastrophe by giving tax breaks to the fracking industry—one wonders about the hidden agenda there—while undermining carbon capture and storage and the UK’s renewable energy sector.

Ian Mearns (Labour, Gateshead)

I am grateful to my hon. Friend for giving way. Short-term energy security is also important, because, as he points out, we hope that the gas supply from Ukraine is not in jeopardy, but we just do not know. Of course, much of the coal that we import into places such as the port of Tyne—coal is being taken to Newcastle—also comes from Ukraine.

Chris Williamson (Labour, Derby North)

My hon. Friend is absolutely right.

In conclusion, it is essential that the amendment 22 is passed. We should not be rushing, using taxpayers’ money, to encourage an industry that focuses on something that might not even be extractable, as my hon. Friend the Member for Inverclyde has suggested. There are also environmental concerns, not least in relation to carbon emissions—notwithstanding the fact that the carbon emissions are somewhat less than those from coal power generation. If we are serious about a decarbonised economy, we cannot be putting too many eggs—can we?—in the fracking basket. While it may be part of the mix, we need to consider supporting and encouraging the renewable energy sector.

Duncan Hames (Liberal Democrat, Chippenham)

I thank the hon. Gentleman for giving way, because my point is relevant to the debate and the Bill. Given his concerns about hydraulic fracturing, am I right to interpret from his remarks about coal that he would rather the UK burn more coal—more UK coal—for electricity than develop hydraulic fracturing to extract gas? Is that his position?

Chris Williamson (Labour, Derby North)

My position is this. First and foremost, we should seek to expand the UK’s renewable energy capacity. Secondly, I think there is a potential role for fracking, but a lot more research needs to be done before we start to give these big tax handouts to exploit this unproven technology in the UK. Coal could form part of the mix—particularly when, as I said, we imported 50 million tonnes of coal last year. What are we doing? There is potentially a role for coal, but we need to invest in carbon capture and storage to ensure that we have clean coal technology and do not exacerbate the environmental implications.

The most important thing is to ensure that we decarbonise our economy. That means investing in renewable, but also reducing the demand for energy, and not by undoing and undermining our industry, but by reducing the demand through better energy efficiency measures. That would mean a massive investment in energy efficiency, home insulation and more efficient measures in industry as well. That would not only be environmentally beneficial, but would generate hundreds of thousands of much needed, highly skilled jobs in our country. That would help to create an economic virtuous circle, because those people would obviously pay tax and national insurance, creating demand in the economy, so everyone would benefit.

Christopher Pincher (Conservative, Tamworth)

The hon. Gentleman is very generous in giving way, as well being very entertaining. He made the point that the expansion of the green renewable economy is important. Is he aware that today wind power generates 538 MW of capacity? That is 1.5% of our national needs. If he so keen on a massive expansion in our green economy, how much does he think we need to generate?

Chris Williamson (Labour, Derby North)

It is not just about wind turbines. I have already made the point that it is about reducing the demand and looking at a range of different areas of renewable technology. Solar plays a part, as does geothermal. There is a host of different areas that could be looked at. I do not want to put a figure on it, but I know it needs to increase. It is vital for the future of humanity and the long-term economic interests of the UK. I very much endorse and support the amendment of my hon. Friend the Member for Newcastle upon Tyne North.

Chris Heaton-Harris (Conservative, Daventry)

It is a pleasure to serve under your chairmanship, Mr Caton. I will be brief because I do not want to detain the Committee. I wanted to follow the hon. Member for Derby North because I am not convinced that he is the one for picking winners in any argument. At the weekend he was praising the Venezuelan Government for being so wonderfully democratically elected—interesting—and celebrating Hugo Chavez’s legacy. This is a country that is rationing not just food and water, but electricity. Listening to the hon. Gentleman, I tend to think that he would be very pleased for the UK to go down that track.

It is interesting to hear how the Opposition have framed the debate today. In the political environment we live in, we all know that the Greens are chomping at their heels. While Government Members might have our own issues, it is fairly obvious that, for the Opposition, pandering to the Greens is the big deal to try to shore up their core vote at the moment. This amendment is definitely part of that. It is fascinating that the party of miners is now against mining. What a full circle the Opposition have made.

Chris Evans (Labour, Islwyn)

Does the hon. Gentleman think that when Governor Schwarzenegger was in power in California, he was right to pursue a target of a million solar-powered homes, a hydrogen highway and also to reduce carbon—[ Interruption. ] That was really unhelpful. I was trying to make my point and the hon. Member for Tamworth has just ruined it.

Chris Heaton-Harris (Conservative, Daventry)

Just for the record, my hon. Friend the Member for Tamworth said that we cannot make comparisons with America in this debate. We probably cannot make true comparisons with America, but it is worth looking to America to see what has gone on. On the extraction of shale gas, America did not sign up to its Kyoto targets, but it has hit them, not because it is doing anything dramatic with renewables, but because it has switched its energy production from mainly coal to mainly shale gas. If we want to go greener in the medium term, shale is obviously the way forward.

I understand how the hon. Member for Newcastle upon Tyne North couched her argument, and fair enough, but I do not think the reason for the amendment is the one she stated. Rather, it is to try to put off investment in shale, which is particularly bad for our economy. I hope she will not press the amendment, because we have to invest in this technology. It has been proven to be a game changer. Indeed, I am quite convinced that one reason why President Putin is involved in Ukraine as we speak is the Crimean shale ban and his concerns about Poland and Ukraine becoming energy-efficient in the future.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The hon. Gentleman misreads the Opposition’s amendment. We are asking the Government to look at the potential impact and implications of the change. The amendment would in no way prevent the exploration that clause 65 looks to encourage.

Chris Heaton-Harris (Conservative, Daventry)

Forgive me, but I listened to the hon. Lady’s speech, as well as reading the amendment, and it was the words in her speech that gave that impression. Realistically, if we want to have energy security and a sensible energy policy, we have to include shale gas. Why not invest in it? One concern she raised was that environmental and other concerns need to be addressed beforehand. If the Government had done that before wind turbines, she could have looked at amplitude modulation and the public health problems associated with wind, or the economic consequences of siting wind turbines close to people’s homes and what that does to individuals. However, the Government chose not to do that; indeed, they have over-subsidised onshore wind to a huge extent, but that is a different argument. I just think it is unwise for the Opposition to go down this particular track, unless of course they are worried about their green fringe.

Nicky Morgan (Conservative, Loughborough)

I thank all hon. Members for entering into this debate. I will set out the reasons why I disagree with what the hon. Member for Newcastle upon Tyne North said, but I thank her for at least waking the Committee up. There is no doubt that energy policy has got Members in all parts of the Committee interested in what we are saying, whereas some of the other, perhaps more exciting clauses have not had that impact.

Clause 64 and schedule 11—which aroused less excitement among hon. Members—make changes to support the early development of onshore oil and gas projects. The change will extend from six to 10 months the number of accounting periods for which a company can claim ring-fence expenditure supplement, in relation to qualifying expenditure or losses from onshore oil and gas projects. It is part of a package of measures providing significant support to the UK oil and gas industry.

As we have heard, the exploitation of shale gas and other onshore hydrocarbons provides—as at least those of us on this side of the Committee believe—a significant economic opportunity for the UK. It could create thousands of jobs, generate billions of pounds of business investment, lead to substantial revenue for the Exchequer and increase our energy security, so kick-starting exploration for onshore oil and gas is very much a part of our economic plan. That includes ensuring we have the right tax regime in place to incentivise early—I emphasise the word “early”—investment.

The oil and gas tax regime includes a ring-fence expenditure supplement, which allows companies without profits in the oil and gas ring fence to uplift their losses and pre-trading expenditure by 10% for up to six accounting periods. That ensures that companies can maintain the time value of their losses and pre-trading expenditure ahead of being used to set off against profits. Onshore projects typically have longer payback periods than those offshore, so the restriction to six accounting periods is likely to act as a disincentive to investment. The changes made by clause 64 will support the development of onshore activity by recognising the longer payback period for these projects and that, at least in its early stages, the industry will be dominated by companies without other profits from oil and gas production.

The change made by clause 64 will amend the Corporation Tax Act 2010 to extend the number of claims available to companies involved in onshore oil and gas activities from six to 10 accounting periods. The measure will have effect for pre-trading expenditure incurred on or after 5 December 2013. For losses arising in an accounting period straddling the commencement date, the measure apportions the losses before and after it. The measure is not expected, as we have heard, to have an Exchequer impact. Together with the onshore allowances, which I will come to in a moment, clauses 66 and 67—the extension to reinvestment relief and to the substantial shareholdings exemption respectively—clause 64 is expected to support companies involved in the exploration and appraisal of onshore oil and gas projects. If exploration establishes the commercial viability of the UK’s onshore oil and gas resources, it could result in a significant increase in domestic production, energy security, business investment and jobs. Any resulting increase in production also has the potential to lower energy bills for households and businesses.

Ian Swales (Liberal Democrat, Redcar)

On a point of definition, most of the schedules we are discussing hardly mention gas, so I am assuming it is regarded as a subset of oil. Is gas derived from coal beds by coal bed methanation or gasification, for example, also included in the ambit of this measure?

Nicky Morgan (Conservative, Loughborough)

I thank the hon. Gentleman for that question. The honest answer is that I cannot give him that level of detail now, but perhaps I will be able to do so by the end of my speech. If I cannot, I will ensure that he receives that information.

The hon. Member for Newcastle upon Tyne North asked about the number of businesses that would be affected by clause 64. As I have emphasised, this is about early incentivisation. I cannot predict with any certainty how many businesses will be affected, but we receive many representations to the Treasury that indicate that there are many businesses that want to explore this area. As she said, some wells that have already been sunk.

Let me turn to clause 65, schedule 12 and the Opposition’s amendment 22. In her opening remarks, the hon. Lady said that she wanted to set out the Opposition’s approach to shale gas and that she wanted a mature debate on it. I welcome that, but I gently suggest that that position is not always shared by all Opposition Members. The hon. Member for Derby North spoke eloquently and with great passion, but I am not sure it was quite the mature debate that his colleague on the Front Bench was looking for. If the Opposition want a mature debate, they might also want to examine their party election broadcast from last week, which sank to a new low in British politics.

The one thing that the hon. Member for Derby North said that I agreed with was his call for an energy mix. He is right. We had 13 years of very little action on this issue. The hon. Member for Newcastle upon Tyne North and other Opposition Members talked about everyone going headlong into shale gas and it being effectively the only game in town. However, they completely missed the fact that this Government have got investment in our next nuclear plant going and continued investment in solar and renewables, as well as missing the whole electricity market reform agenda of the current Session—which is just ending—including the contracts for difference, the renewables obligation and all the other changes that have been introduced. Labour had 13 years to address the issue of energy security and supply and it failed to do so. As a result, this Government have had to take tough action and immediate decisions in order to put our energy security on a firmer footing, so I am not going to take any lessons from the Opposition.

The clause and the schedule make changes to incentivise investment in onshore oil and gas projects. They introduce a new allowance, which exempts a portion of a company’s profits from the supplementary charge. The amount of profit exempt will equal 75% of the qualifying capital expenditure that a company incurs on onshore oil and gas projects on or after 5 December 2013. This allowance makes the UK’s tax regime for shale gas the most competitive in Europe. Shale gas and other onshore oil and gas represent a huge economic opportunity for the UK.

The hon. Member for Newcastle upon Tyne North mentioned the Institute of Directors’ estimates that investment in shale gas alone could peak at £3.7 billion a year, supporting 74,000 jobs across the country. I am afraid her remarks typify the Opposition’s economic policy, according to which our long-term economic plan was going to lead to millions more unemployed. As we have seen, the employment rate has reached its highest level. Even if the figure of 74,000 jobs were optimistic—which I do not think it is—I thought it interesting that the hon. Member for Newcastle upon Tyne North dismissed the creation of 16,000 to 32,000 jobs as a bad thing. She also said the creation of between 50,000 and 64,000 jobs was not good enough. For each one of my constituents who gets a job, it is a huge personal success, providing security for them and their families. To say that so many thousand jobs are not worth bothering about is to miss entirely the debate we have had for the past four years in this country about getting the economy back on track and growing.

The benefits of this investment would extend beyond oil and gas to other manufacturing sectors—construction, engineering and others—which is why major industrial employers have publicly supported its development. Developing our indigenous oil and gas resources could lead to lower energy bills for households and businesses. It could increase our energy security, making us less dependent on imported supplies and reducing our exposure to geopolitical risks and lengthening supply chains.

The hon. Member for Newcastle upon Tyne North talked about the US. The US experience demonstrates the potential. In 2012, its shale gas industry accounted for more than 600,000 jobs and paid almost $20 billion in tax. It helped to reduce the price of gas, with prices falling about 70% between 2008 and 2013, improved the balance of payments and reduced dependence on gas imports. It has revitalised the manufacturing sector. It is right to say that the extent to which the US experience can be replicated here is not yet clear, but we are committed to doing everything we can to create the long-term conditions to incentivise investment and support the industry’s development. That includes putting the right fiscal framework in place to ensure that companies can fully explore the potential of our natural resources.

In relation to comparisons with the US, a recent Economic Affairs Committee report states:

“Even if its economically recoverable reserves of shale gas prove substantial, the UK is not likely to see gas price cuts on the scale of those in the US. Indigenous production would however be cheaper than imports of liquefied natural gas (LNG), improve the balance of payments and provide better security of supply.”

Those are all very worthy things that the Government have taken the responsibility to explore.

Iain McKenzie (Labour, Inverclyde)

Will the Minister say whether the Government intend to give the same incentives to companies that wish to explore tidal generation?

Nicky Morgan (Conservative, Loughborough)

Those incentives already exist, with the support for exploration, research and development. The Energy Technologies Institute, which is based in my constituency, has led the way in research, working with the private sector. As I have said, the Government remain committed to a broad energy mix, with energy generated in many different ways.

Nicky Morgan (Conservative, Loughborough)

I was just responding to the hon. Member for Inverclyde about hydropower. The Government are open to all energy sources, in particular to renewables, and have offered many incentives to those different technologies, but today we are discussing shale gas.

Clause 65 and schedule 12 introduce a new allowance to drive early investment in onshore oil and gas projects that are economic but not commercially viable at the 62% tax rate. The onshore allowance reduces the tax rate on a portion of a company’s profits from 62% to 30%. Companies pay at the reduced rate on profits equal to 75% of their capital investment on qualifying onshore projects. To ensure the allowance is appropriately targeted to support only projects that would not have gone ahead without it, very large projects will not be eligible. The allowance includes a provision for cross-site relief. That allows companies to transfer allowance generated on an unsuccessful site to a successful site after a three-year delay, providing companies with a greater degree of certainty on the availability of the allowance and increasing the investment incentive.

As the hon. Member for Newcastle upon Tyne North mentioned, there is a short-term cost to the Exchequer of introducing the allowance—£45 million over the course of the scorecard period. The cost reflects the increased investment that the allowance is expected to generate, which will receive 100% first-year capital allowances. However, the cost is expected to be significantly outweighed by the longer-term revenue generated.

At various points the hon. Lady asked me to obtain and use my crystal ball to predict the number of jobs created, the number of companies that will benefit and how much the provision will cost. The important thing is that we are talking about early-stage investment. That is what the industry has been telling us it wants to receive. It is not possible to predict the impact beyond the scorecard period because projects such as the one we are discussing have long lead-in times and will not fully come into development for many years. Therefore, it is not possible to make the specific predictions she has asked for.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister said that the measure is what the industry has been asking for. I asked a specific question about exactly who had made those representations. As far as we are aware, the allowance came entirely as a surprise to the industry. Will the Government be a bit more transparent about what representations were made requesting the tax break?

Nicky Morgan (Conservative, Loughborough)

The hon. Lady will know that the Government publish a list of all the industry bodies and companies they meet, so I am not going to list them. I assure her that the legislation being introduced has been subject to close and productive dialogue in consultation with industry stakeholders. It has been welcomed by the industry and was subject to consultation with the whole industry, much of which responded. In response to the autumn statement, Malcolm Webb of Oil & Gas UK said:

“Oil & Gas UK supports fiscal plans to encourage exploration and development of the UK Continental Shelf, which will ensure the sector remains an attractive and competitive destination for investment and a driving force in the British economy.”

Amendment 22 asks the Government to lay before Parliament, within three months, a report that considers the loss of tax revenues and impact on onshore oil and gas and field development over the next 10 years. In addition the report should consider the differential impact on individual shale fields. The Government are not minded to accept the amendment for the reasons I will set out. In the Budget, the Chancellor announced a review of the entire oil and gas fiscal regime to ensure it remains competitive and fit for purpose as our oil and gas basins mature. The review will look at all aspects of the fiscal regime, including allowances. It would therefore be unhelpful to review one allowance in isolation, rather than considering it alongside all the other aspects of the wider oil and gas fiscal regime.

Secondly, the amendment asks for the report to be laid before the House within three months of Royal Assent. Much of the onshore oil and gas industry—in particular the unconventional oil and gas industry—is in its infancy, with projects still at the exploratory or pre-exploratory stage. Such projects, as I have said, typically have a long lead-in time and will not come to full development for many years. It would therefore not be possible to assess the full impact of the measure in such a short time scale.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I should be grateful if the Minister confirmed the time scale for the review that is being undertaken on the broader issue. Also, she says it would be inappropriate to focus on one small item as part of a separate review, so by the same token is not it inappropriate to grant a separate tax incentive without first carrying out the review that she says is due to report?

Nicky Morgan (Conservative, Loughborough)

The tax regime is very much in line with the other tax regime that is already available to the oil and gas industry in its widest sense, as it is for the ring-fence proposals that I have just outlined with respect to clause 64. As to the fiscal review, the Government are currently working with industry—in fact, I shall travel to meet representatives of the oil and gas industry next Tuesday, and the fiscal review timings will no doubt be discussed. I am happy to be guided by industry.

One thing that industry representatives repeatedly tell me about at meetings is the long lead-in time for projects and the length of time taken for investment decisions. Those decisions are not quick, and the impact of changes is not necessarily seen instantly. Industry asks us for time in our launching of the review. I do not think I can tell the hon. Lady specifically that it will report by x year or y year. The point is that we are working with and listening to the industry, which has broadly welcomed the announcement of the review.

We do not think it would it be possible properly to assess any loss in tax revenues or potential yield over a 10-year period so quickly. We have estimated the cost of the measure at £45 million over the scorecard period. Beyond that, we would expect an increase in Exchequer yield because of additional production and profits incentivised by the measure, but it is too early to provide specific forecasts. However, industry forecasts are positive for future activity on onshore oil and gas. After the measure was announced in the autumn statement, Ken Cronin, chief executive of UK Onshore Operations Group, said:

“Today’s announcement of a new onshore oil and gas regime is as much about tomorrow as today. To build a strong industry which can contribute to the UK economy, the country needs the correct framework for operators, and that includes a clear signal that an appropriate and fair tax regime is in place that will incentivise the long term nature of investments. The Chancellor’s initiatives should be welcomed as they give that strong signal.”

Indeed, we are already starting to see investment in the UK onshore industry from global players such as Centrica, Total and GDF Suez.

Finally, to reassure the hon. Member for Newcastle upon Tyne North, I can say that, as stated in the tax information and impact note, the measure will be kept under review through regular communication with affected taxpayer groups.

There were some questions and I want briefly to deal with them.

Chris Williamson (Labour, Derby North)

I appreciate the Minister’s setting out the justification for the tax allowance. Given her previous comments about the Government still supporting the renewables sector, why does the Red Book say that the enterprise investment scheme will no longer be available for

“companies benefiting from Renewables Obligation Certificates and/or the Renewable Heat Incentive”?

Is not that the opposite of what she has claimed?

Nicky Morgan (Conservative, Loughborough)

Actually, if the hon. Gentleman had read into this, as my hon. Friend the Exchequer Secretary to the Treasury has done, he would appreciate that that is good news, because the EIS is available for risky investments. We are saying that the renewables industry is maturing in this country and that broader investors who might not want to make risky investments are now investing in that sector. It is good news.

As I was saying, we talked about the views of local communities that might be against fracking. Of course, Members of Parliament from all parties are here to represent our constituents and listen to them when they express concerns. I should put on the record that communities can expect that companies developing shale will engage with them at each of the three stages of operations: exploration, appraisal and production. The industry’s own charter commits it to engage in advance of any operations in respect of any application for planning permission.

I believe that communities should also see concrete benefit. The industry has committed to a package for communities that host shale in their area, including £100,000 per hydraulically fractured well at exploratory stage being paid out to the communities and 1% of revenues during production.

I can understand where the hon. Member for Daventry came from. The trouble was that, like so much else with Opposition policy overall, the amendment tabled by the hon. Member for Newcastle upon Tyne North says one thing—“We quite like shale gas and fracking, but we would like to have a review of it”—but that was not the tone of her comments. There were lots of questions and lots of statements suggesting that the Opposition were saying, “We’re very unsure about this and we’d like to be looking at other things too.”

The hon. Lady talked about environmental concerns, as other hon. Members did. We have been clear that wherever hydraulic fracturing is conducted, it must be done in a safe and environmentally sound way. Robust regulations are in place to ensure on-site safety, prevent water contamination and mitigate seismic activity and air pollution.

Charlie Elphicke (Conservative, Dover)

The Minister may know that, in my constituency, there are three potential sites for underground coal gasification, which is a form of fracking. My constituents are concerned about the safety of the water table, particularly as it is our drinking water aquifer. They are also concerned about risks of earthquake and earthquake-type risks. Will she confirm that the Government are committed to ensuring that this new technology is absolutely safe, for my constituents’ benefit?

Nicky Morgan (Conservative, Loughborough)

I thank my hon. Friend for his remarks. The Government are listening to the concerns of communities and want to deal with them. That is why new controls have been introduced to mitigate the seismic risks identified following events in Lancashire. A precautionary approach will be adopted for the fracking of the next few wells. The operators will be subject to particularly close scrutiny to ensure that the controls are being applied correctly and that they are effective.

In relation to water supply, water for fracking operations has been provided by local water companies, which are obligated to produce and update a long-term plan every five years that has contingency reserves in case of a drought. Therefore water companies will assess the amount of water available before providing it to operators. I assure my hon. Friend that checks and balances are in place.

Ian Mearns (Labour, Gateshead)

The Minister will understand concerns of Opposition Members, Members of all parties and the general population about comparisons between fracking in the United States of America and in the United Kingdom. There is a much lower likelihood of fracking having an immediate impact on someone in the USA. Its land mass is 365 times that of the UK but its population is only five times greater. Obviously, interaction is much less likely to occur in a land mass that great with such a population.

Nicky Morgan (Conservative, Loughborough)

I understand what the hon. Gentleman says and, as I have already said, I understand constituents’ concerns about fracking. I am not going to get into measuring wells and how close the average well is to settlements in the US compared with the UK because I am not an expert. However, I have already set out for the record that the Government are aware of those concerns, and are monitoring and dealing with them.

This is still an important potential energy supply. That is the overall thrust of this debate. Opposition Members agree that it is an important source of energy that we should be exploring. The Government are putting that regime place.

Ian Swales (Liberal Democrat, Redcar)

I will not test the Minister any more on her technical knowledge, but let me just say that it is important that the people in this place understand enough about the technology to be able to talk about it. For example, most technologies involved in extracting gas from coal beds are not “fracking” and the word should not be used.

Nicky Morgan (Conservative, Loughborough)

The hon. Gentleman is entirely right. Sometimes in this place we discuss important topics that we may not be experts on. It is right that the correct terms are used. He provides me with a useful opportunity to come back to him on his original intervention before the Division in the House. I can confirm that all hydrocarbon production is subject to the oil and gas fiscal regime, including gas from coal, except when the gas is produced in the course of making mines safe. Clauses 64 and 65 will apply to coal bed methane. I hope that is of assistance.

The hon. Member for Newcastle upon Tyne North asked whether the move to export our gas was incompatible with the UK’s climate change targets. Shale gas is compatible with our legally binding carbon goals. Gas has an important role to play in the UK’s energy mix, while still meeting our commitments under the fourth carbon budget. A continuing role for gas is consistent with decarbonising—much of the capacity will be replacing older and more carbon-intensive coal. I will not have a debate with the hon. Member for Islwyn about where the coal should be produced if we were to still burn coal, but his plea for Welsh coal was heard on both sides of the Committee.

The hon. Member for Newcastle upon Tyne North looked at the tax information and impact note and talked about the Exchequer impact being £45 million over the course of the scorecard period. She did not quote from the economic impact, which states:

“The onshore allowance is expected to increase investment in unconventional hydrocarbon exploration. If exploration establishes the commercial viability of these resources”—

meaning that we have to have the exploration in the first place, hence the debate—

“then in the longer term there could be a significant increase in the domestic production of hydrocarbons, increased energy security, the creation of jobs and benefits to the UK supply chain.”

Opposition Members said that the importance of shale gas means that other technologies—the hon. Member for Inverclyde talked about two technologies in his constituency—have been shut down. [Interruption.] They are talking from a sedentary position, but they ought to be thinking about the effect of their price freeze policy on investment in the industry—that proposal is chilling in respect of future plans for investment in the industry.

On the question of whether people who are investing in wind farms will move to fracking for quick money, the answer is no, we do not believe so. Wind farms are not taxed higher than oil and gas rates. They would be taxed, because they are corporations, at a standard rate of 21%, not at 61%. Does the hon. Member for Inverclyde want to intervene?

Iain McKenzie (Labour, Inverclyde)

I thank the Minister for giving me the option to intervene. What is chilling—it is something that the Minister should look at—is families and pensioners having to switch off their energy supply and make a decision between heating and eating.

Nicky Morgan (Conservative, Loughborough)

I wonder whether Opposition Members voted for the decarbonisation target, which would have added another £125 to energy bills. I hope they are doing all they can to promote the warm home discount and encouraging everybody eligible to apply for it and other green schemes. That is £140 available to vulnerable households. I hope the hon. Gentleman sent out that press release to his constituents.

Clause 64 and schedule 11 will ensure that we continue to get the most economic benefit from the country’s oil and gas resources, incentivising investment in onshore oil and gas projects that will provide jobs, growth and greater energy security. I echo those comments for clause 65 and schedule 12. I hope the Committee does not adopt Opposition amendment 22.

Clause 65 - Supplementary charge: onshore allowance

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I beg to move amendment 22, in clause 65, page 55, line 36, at end insert—

‘(1) The Chancellor of the Exchequer shall, within three months of Royal Assent, undertake a review of the impact of the creation of the onshore allowance introduced under this section.

(2) The report referred to in subsection (1) above must in particular examine—

(a) the estimated total loss of tax revenue to the Treasury in the next 10 financial years;

(b) the impact on onshore oil and gas exploration and field development in the next 10 years; and

(c) the differential impact on individual shale fields.

(3) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.’.

There has been a broad debate today, from being balanced in areas where there is a lot of agreement, to a certain lack of clarity for Opposition Members as to exactly what impact assessments have been made on clause 65. Therefore, we will press our amendment to a Division. It is in the interest of the Government, the Opposition and particularly the public that we have a proper assessment of the impact of clause 65.

Clause 66 - Oil and gas: reinvestment after pre-trading disposal

Catherine McKinnell (Labour, Newcastle upon Tyne North)

With your permission, Mr Caton, I would like to consider clauses 66 and 67 together as they have been introduced as part of a package of measures with the same policy objectives and intended outcomes.

Martin Caton (Labour, Gower)

Does the Committee agree?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you, Mr Caton. Although Budget 2014 announced that the Government, working with the new oil and gas agency, will review the tax treatment of North sea oil

“to ensure that it continues to incentivise economic recovery as the basin matures”,

the measures introduced by clauses 66 and 67 were both announced in the autumn statement 2013. Both are intended to support companies that are engaged in oil and gas exploration and appraisal activity, but are yet to start trading within the ring fence. As the Committee will know, the Finance Act 2009 introduced reinvestment relief to companies with ring-fence oil and gas trades, meaning that they are not subject to corporation tax on chargeable gains that arise on the disposal of assets in the circumstances in which disposal proceeds are reinvested in new oil trade assets, and the disposal and acquisition qualify for roll-over relief.

According to the tax information and impact notes, both measures are expected to have nil Exchequer impact over the period 2014-15 to 2018-19. Both clauses have been introduced to support investment in companies involved in oil and gas exploration and appraisal activity, which is, of course, welcome. However, both of the tax information and impact notes for the measures state that they are

“not expected to have any significant economic impacts…Only a small number of UK businesses will be affected by the measure. The proposals are designed to support exploration companies. This measure is expected to have a negligible impact on these businesses.”

Given the somewhat pessimistic assessment of what clauses 66 and 67 are likely to achieve, will the Minister outline the thinking behind the measures, which are, in HMRC’s own words,

“not expected to have any significant economic impacts”?

Both will have nil Exchequer impact and will benefit

“only a small number of UK businesses”.

Of those that will benefit, the impact will be only “negligible”. Exactly how many firms does she expect to benefit, and how many jobs does she expect to be supported as a result? What increase in exploration and appraisal investment and activity does she expect to see as a result of clauses 66 and 67?

Could the Minister also say a little about the long-term review of the tax treatment of the North sea that was announced at Budget 2014 and that was referred to in our discussions on the previous measures? When are decisions on that important issue likely to be made? We agree that certainty is key to investment decisions, and therefore it would be useful to have a little more information about exactly what the timetable for the long-term review is likely to be.

We are well aware of the nationally important role played by the UK oil and gas industry, which makes a very substantial contribution to our economy, energy security and employment. Indeed, in 2012, the oil and gas sector provided employment for about 440,000 people across the whole country, including for more than 10,000 people in my region of north-east England.

Of course, the lion’s share of those jobs—45% of them—are based in Scotland. I am sure that the Minister, like me and every member of the Committee, believes that the UK is better together. Will she therefore comment on the important fiscal role that the UK Government play in supporting the national oil and gas industry and how the sector will be best served by our remaining together?

Nicky Morgan (Conservative, Loughborough)

I thank the hon. Lady for her remarks. Clause 66 makes changes to align the tax treatment of pre-trading oil and gas exploration and appraisal companies to that of companies that have commenced a ring-fence trade. It will extend reinvestment relief to prevent a chargeable gain being subject to a corporation tax charge when a company sells an asset in the course of oil and gas exploration and appraisal activities, and reinvests the proceeds in the UK or the UK continental shelf. The change is expected to encourage oil and gas exploration activity.

I will give a little background. Currently, reinvestment relief allows companies that are carrying on a ring-fence trade to sell their assets without generating a corporation tax charge on any gain if they reinvest the proceeds of the sale back into the UKCS. A typical example of such a transaction is a company disposing of an interest in an oil licence together with assets such as a platform and pipeline, and acquiring an interest in a new licence and assets. In that way, companies can vary their portfolio of assets without incurring a tax charge as long as further investment takes place. That helps to ensure that oil licences and associated assets end up in the hands of the companies that are best suited to exploit them.

However, a company that is not yet carrying on a ring-fence trade is unable to take advantage of this exemption. Such companies are typically smaller exploration companies, which are seen as the lifeblood of the oil and gas industry. Without those exploration companies, there would be no new discoveries to replenish the declining reserves of North sea oil and gas. The Government have listened to the industry’s concerns and clause 66 will address the difference in tax treatment between trading and pre-trading companies, to help to encourage greater exploration.

The changes made by the clause will extend the scope of the legislation to ensure that any company that carries on exploration and appraisal activity within the UK or UKCS will benefit from reinvestment relief in exactly the same way as a company carrying on a ring-fence trade. That will benefit the smaller and typically UK-based exploration companies that have been hardest hit by the economic downturn. It will also support investment in UK-based industries, and protect and create UK jobs, not only in Aberdeen and Scotland, but throughout the rest of the UK—the hon. Lady mentioned the 10,000 jobs in her own region in the industry. The clause will also help to ensure that we are able to maximise the benefit of our remaining resources.

Clause 67 makes further changes to align the tax treatment of companies involved in oil and gas exploration and appraisal activity in the UK or UKCS, and which have not commenced trading, to that of companies that have commenced a trade. The clause will extend the scope of the substantial shareholding exemption to companies owning assets used for the purposes of oil and gas exploration and appraisal. Previously, that aspect of the substantial shareholding exemption applied only when assets were used for the purposes of a trade.

The substantial shareholding exemption prevents a corporation tax charge for gains arising from disposals by companies of shares, when certain conditions are met. It allows groups of companies to restructure without decisions being driven by tax implications. In most cases, the exemption applies only when a company has held a substantial shareholding in a subsidiary for the 12 months before the disposal. However, under the current legislation, the 12-month requirement is waived where the company being disposed of holds an asset used for the purposes of a trade. In the context of the oil and gas industry, a trade involves the exploitation of oil rights and the development of oil and gas. A typical example of assets used for the purposes of ring-fence trade would be an interest in an oil licence, together with assets such as a platform and pipeline. The substantial shareholding exemption allows companies to sell their existing interests in North sea assets without incurring a tax charge, enabling them to invest a greater amount in new North sea interests. This helps to ensure that the oil licences and associated assets end up in the hands of companies that are best suited to exploit them.

However, a disposal of shares in a company that is not yet carrying on a ring-fence trade does not qualify for the exemption. Such companies are typically smaller exploration companies, which are seen, as I have said, as the lifeblood of the oil and gas industry. Without such exploration companies, there would be no new discoveries to replenish the declining reserves in our North sea oil and gas. The Government have listened to industry’s concerns, and the clause will address the difference in tax treatment between trading companies and non-trading exploration companies.

Clause 67 will extend the scope of the legislation to ensure that companies investing in or carrying out exploration and appraisal activity in the UK or UK continental shelf will benefit from the substantial shareholding exemption in exactly the same way as a company carrying on a ring-fence trade. That will support investment in exploration activity, leading to increased production and helping us to get the most from our vital national interests. As I have said, the investment will help to create and sustain jobs across the whole UK both directly and indirectly through the supply chain.

Let me turn briefly to the hon. Lady’s questions. She effectively asked me to take out and polish my crystal ball when she asked me how many companies would be affected. The small numbers of oil and gas exploration companies that I have already mentioned will be affected, but it is difficult to say exactly how many, because the licence interests in the North sea are continually changing. She asked about representations. We have received many representations on the matter, and we have spoken to many interested stakeholders, including representative bodies.

The hon. Lady asked for the two clauses to be taken together, the point being that the measure is part of a whole package. She will appreciate that various bodies will identify issues here and there that they believe will affect them or their companies. Therefore, the Government are signalling that the oil and gas sector is, as she said, very important to the whole of the United Kingdom, particularly in Scotland. I entirely endorse her comments about us being better off together, and we must recognise the importance of oil and gas to the Scottish economy.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I appreciate that the Minister is not Mystic Morgan, but members of the Committee and members of the public would like to feel that the Government have put some thought into the measures in the Bill and given some consideration to the companies that will benefit. My questions are designed simply to elicit more information than is currently available, particularly given the total lack of information in the tax information and impact note, which gives the impression that the measure will have absolutely no impact on anybody anywhere.

Nicky Morgan (Conservative, Loughborough)

I understand the reasons behind the hon. Lady’s question. If I were in her shoes, I might be asking the same question, because I probably would not have much else to ask. It is nice to be called Mystic Morgan, although I suspect that Mr Morgan may choose to disagree with that description.

The point about the changes is that they mostly concern small exploration companies, which are often start-ups. As the hon. Lady will appreciate, and as Government Members certainly appreciate, Government creates the environment for businesses to flourish. It is not for the Government to set out that x companies will benefit in year 1 and y companies will benefit in year 2. Instead, these and other changes create the conditions that allow companies to start up and incentivise them to invest.

I will not get involved in that dialogue; I will move on to talk about the evidence that the legislation will have any real benefit to exploration companies. As I have mentioned, the legislation has been subject to close and productive dialogue with industry stakeholders. It will remove a fiscal barrier to companies deciding to sell assets, making those transfers simpler and aligning the tax treatment with that of companies carrying on a trade, whether in the oil and gas industry or not.

The hon. Lady asked about the fiscal review. That was announced initially at the autumn statement, setting out a road map for ongoing work. It is dependent on changes and conclusions, and exploration will be included. I mentioned in the debate on a previous clause that the industry welcomes discussions about the review, its shape—which will depend on its chairman—and the areas it should explore. I cannot predict when the review will report, because we want to get it right and to encourage this important industry, particularly up in Scotland.

The hon. Lady also asked about the Exchequer costs in the tax information and impact note being nil. That is because exploration companies can already be exempt from tax under the current legislation. The clauses still enable exploration companies to achieve exemption, but in a simpler and more flexible way.

For the reasons that I have set out, these clauses will help further to level the playing field for all companies wanting to invest in the North sea and will be welcomed by the oil and gas industry. They are a further example of the Government’s support of the important UK oil and gas industry. I therefore hope that the clauses will stand part of the Bill.

Clause 68 - Partnerships

Shabana Mahmood (Labour, Birmingham, Ladywood)

I beg to move amendment 15, in clause 68, page 61, line 39, at end insert—

‘( ) The Chancellor of the Exchequer shall, within six months of the passing of this Act, publish and lay before the House of Commons a report setting out the impact, over the next three years, of the changes made to the Corporation Tax Act 2009 and the Income Tax (Trading and Other Income) Act 2005 by Schedule 13.

( ) The report must in particular set out—

(a) how much additional tax revenue the measures introduced by this section are expected to generate to the UK Exchequer, for each year in which they are in operation; and

(b) the impact of those measures on revenues lost to the Exchequer as a consequence of tax avoidance schemes for each year in which they are in operation.’.

Martin Caton (Labour, Gower)

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 13 be the Thirteenth schedule to the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 68 and schedule 13 introduce changes to the taxation of partnerships, in particular limited liability partnerships. The reforms are designed to prevent tax avoidance through the use of certain partnership structures. There are four main changes. First, there was previously a presumption of self-employment for partners in an LLP. The new rules remove that presumption and introduce a series of tests designed to stop the disguising of normal employment arrangements through LLP structures.

Secondly, profit sharing within partnerships can be flexible, which in the past has been used to generate tax advantages, particularly in relation to mixed-membership partnerships, which is when there are both corporate and individual members. Various structures have been used to allocate profits to a low-tax entity, such as a company, while losses were allocated to individual partners, who could make more tax-efficient use of the losses. The new measures aim to prevent these types of arrangements.

Thirdly, one of the arguments used to justify the need for mixed-member partnerships was the need to warehouse profits that cannot be paid to partners in cash as a result of regulatory requirements. In particular, under the alternative investment fund managers directive, AIFMD firms are obliged to withhold elements of remuneration payable to certain staff, including partners or members of an LLP, and to make the right to receive this conditional or subject to clawback. When the rules apply to members of an LLP, the tax treatment is that all the profit is taxed in the year in which the profits are made, irrespective of whether such profits are paid out. Under the new rules, AIFMD firms will allow that profit, which is required to be deferred, to be allocated not to the relevant individual, but instead to the firm itself, which will pay tax on this at the higher rate. When the individual is able to access the profits, he or she will be taxed, but will receive a tax credit in respect of the tax paid by the firm and any overpayment of tax may be repaid.

Fourthly, on asset disposals, one partner could previously transfer an asset or income stream to another partner in return for a payment and the transferee might have had a tax attribute that would mean it was not taxed on that income stream. Under the new rules, when a person disposes of an asset or income stream through a partnership and the main purpose, or one of the main purposes, is to secure a tax advantage, the new rules would impose an income tax charge on the person making the disposal or transfer of the asset.

By way of background, LLPs set up under UK legislation are bodies corporate that combine the organisational flexibility of traditional partnerships with the benefit of limited liability for their members. The policy intention when LLPs were introduced was that they would be treated for tax purposes as though they were traditional partnerships, rather than being subject to corporation tax, as would be normal for a body corporate. That means that individual members are taxed on their share of the profits of the LLP in the same way that individual partners in a traditional partnership are taxed.

The schedule introducing these changes is very long, and the rules are detailed and complex. There are two very helpful HMRC technical notes, which between them have a total of 57 examples, each of which contain scenarios that are caught or not by the new rules—I rather felt like I was back at bar school as I was working my way through each scenario and working out whether the new rules caught those arrangements or not.

We support the need for action in this area. There has clearly been abuse of the current rules and it is right that action is taken to crack down on tax avoidance in this area. The action is supported by stakeholders, too. The Chartered Institute of Taxation commented at the time:

“There has undoubtedly been some abuse of the current rules with, for example, cleaners and seasonal agricultural workers being made partners to avoid national insurance. The Government were right to review the taxation of LLP members in the interests of fairness in the tax system.”

The House of Lords Economic Affairs Committee also commented:

“The Government is clearly right to look again at the taxation of Limited Liability Partnership members as the legislation introduced in 2000 has failed to bring their tax treatment in line with that of general partnerships, and provided opportunities to avoid tax liabilities.”

The original consultation on partnerships was launched in May 2013, after Budget 2013, in which it was announced that

“the government will consult on measures to remove the presumption of self-employment for limited liability partnership partners, to tackle the disguising of employment relationships through LLP structures”.

That consultation closed in early August and the HMRC published a summary of responses on 10 December 2013, alongside draft Finance Bill provisions. There is, as I am sure the Minister will be aware, a widespread view that the legislative proposals before us today, which appeared in the draft Finance Bill, are very different from those in the May consultation document. Indeed, the CBI said:

“The consultation process which took place between May and August 2013 sought responses to a much narrower set of proposals than those published on 10 December. Had business known these parameters, many more may have responded and those that did respond may have responded differently”.

In addition, the Office of Tax Simplification has also been reviewing the whole area of partnership taxation. It was commissioned to look into the taxation of partnerships in 2013. The interim report of the OTS review was published on 22 January 2014, which was also after the draft Finance Bill was published in December 2013. That seems a somewhat strange way to go about this review and reform process.

The key issue in relation to clause 68 and schedule 13 therefore relates to the process—the problems with the consultation and the substantially different approach adopted in the draft Finance Bill and the Bill before us today. The Minister will know that the House of Lords Economic Affairs Committee recommended delaying the implementation of the legislation until April 2015 to allow for further consultation with interested stakeholders, including business, taxation and legal specialists, so that the legislation can be targeted properly. Will the Minister explain what consideration he gave to that suggestion and why that approach has been rejected in favour of bringing in the rules much earlier?

The Association of Taxation Technicians has said it believes that the attempt to provide an objective measure of when a member of an LLP is a real partner has, in its view, resulted in what it considers to be a fairly mechanical approach. It fears that this approach takes no account of the modern management structure of partnerships or differences in factors such as size, structure, complexity, the nature of the trade, history and career patterns of businesses that are structured as LLPs. As a result, the ATT suggests that there should be a deferral—along the lines suggested by the House of Lords Committee—or, failing that, the inclusion of a clearance provision in the legislation that would enable LLPs to agree with HMRC the tax status of their members and thereby overcome the uncertainties that it believes are introduced by these provisions. However, that is not the approach that has been adopted by the Minister in the clause and schedule before us. It would be helpful to hear from him about the ATT’s fears and whether he considered the idea of a clearance provision that would ensure that the measures do not unwittingly introduce unnecessary uncertainty into the tax system.

As I said earlier, the Office of Tax Simplification conducted a review of partnership taxation, with the results being published on 22 January 2014. Introducing the complex legislation before us will affect many businesses, potentially leading to structural change. On the face of it, that might seem a strange process and unnecessary complication while the results of the OTS review are still being considered. What is the Minister’s response to such claims? Is he concerned that the changes might be seen as a piecemeal approach to reform? How will he ensure that the path he has chosen to take with the legislation before us will provide much-needed stability and certainty to the UK tax system?

Another important issue is whether businesses will have enough time to adapt to the changes, the passing of which will require some LLPs to undergo radical restructuring. The Institute of Chartered Accountants in England and Wales thinks that insufficient time has been allowed for businesses to make the necessary arrangements, given the legislative and regulatory timetable that the Government have pursued. LLP members subject to the new legislation will be taxed as employees from 6 April 2014. The ICAEW thinks that the real-time information requirements for reporting payroll data will merely add to the high administrative burden for LLPs and HMRC. What assessment has the Minister made of whether businesses have enough time to adapt to the changes? What is his assessment of the extent of the administrative burden they will have to bear as a result?

The ICAEW has stated that the proposed new rules for salaried members in LLPs and the non-corporate member rules for all partnerships will involve a significant additional compliance cost for LLPs. Have the Government evaluated the effect on bottom-line costs for the affected businesses? Similarly to our attitude to the changes to the rules on intermediaries and disguised self-employment, although the Opposition welcome measures to counteract tax avoidance, what steps will the Government be taking to ensure that the employment law aspects of the changes are also reviewed?

The increasing divide between employment law and tax law has the potential to lead to more uncertainty, complexity and unfairness as individuals are taxed as employees but without equivalent employment rights. The proposals to tax LLP salaried partners as employees might create a further group of individuals who will be in that position. What discussions has the Minister had with colleagues in other Departments, including the Department for Business, Innovation and Skills and the Ministry of Justice, about the impact of the changes and how they will interact with employment law?

On a broader level, it is apparent that many of the problems being addressed by the proposals stem once again from the different tax costs of employment and self-employment, as well as the different rates of tax paid by small companies and unincorporated businesses. Like me, the Minister will have heard such differences described often as structural problems in our tax system. Many stakeholders believe that until they are resolved we will continue to see piecemeal legislation being introduced. There is a danger that that might make a complex situation and a complicated tax code even worse. Will the Minister set out for the benefit of the Committee the steps that the Government will be taking to perform a thorough review of the whole issue?

The Chartered Institute of Taxation also makes an important point about employment status. It says:

“The result of the Government’s approach in this area, and in respect of agency workers, is that we now have several definitions of when a worker is employed or self-employed.”

It then gives the example of employment law tests, which

“are well known and, in general, the result of applying these tests for, for example, employment rights purposes are followed for tax purposes too.”

It also gives the example of intermediaries legislation. It says that

“these tests apply for tax purposes only, and give rise to no employment rights, and include IR35 and individuals working through personal service companies, individuals working through umbrella companies—managed service companies—as well as the provisions included in clauses 16-21 of the Finance Bill 2014 in respect of employment intermediaries.”

We debated that in an earlier sitting. The chartered institute also points to employment status in relation to ordinary partnerships. It says that

“these tests have been built up over many years and are largely known and accepted by HMRC and taxpayers.”

Now, of course, we have the employment status provisions in relation to LLPs. The institute says that

“the test will apply for tax purposes only and the individuals affected will gain no employment rights.

It fears that the result of all that is a real and growing confusion in the law about how employment status is established. Does the Minister agree? If so, or if he fears that that may prove to be the case, does he propose to look at that?

For those LLPs that are uncertain whether the new rules apply to them, HMRC’s non-statutory business clearance process will not be available until after the Finance Bill receives Royal Assent. Does the Minister think it is right that, given that uncertainty, in the interim those LLPs will need to take a view on whether the new rules apply?

The House of Lords Committee raised concerns that the proposed changes to tax arrangements for LLPs will apply only to UK-registered LLPs and not to those conducting business here but formed elsewhere. Will the Minister explain whether the Government will be taking steps to reconsider the position of non-UK LLPs? I should also be grateful if he would give a breakdown of how the Government arrived at the potential overall £3.26 billion tax yield for these measures.

The intention of our amendment is to probe the Minister. We want to ensure that the expected £3.26 billion tax revenue is realised and we seek reassurance from the Minister that the new proposals will be effective in clamping down on this area of tax avoidance and, given the detail of the legislative tests introduced by schedule 13 in particular, will not inadvertently create more tax avoidance opportunities. I would be grateful for clarification on those points.

Lorely Burt (Liberal Democrat, Solihull)

I rise to make a couple of points raised with me by LLPs in my constituency and friends on the House of Lords Economic Affairs Committee. I do not want to duplicate the hon. Lady’s points, but I want to raise: the legislative tests to determine the status of LLP members; the application of the new rules from the start of the fiscal year, April 2014; and the position of non-UK LLPs.

The three legislative tests in the Bill for determining whether a member of an LLP is an employee of the partnership rather than a true partner seem a little different from those consulted on before the draft Bill was published. The House of Lords Committee felt that those tests will fail to achieve parity with the outcomes produced by the general partnership rules as the Government intend. Will my hon. Friend the Minister remain open to suggested amendments with the aim of making improvements and clarifications to that?

Can we consider allowing businesses to apply the changes from the beginning of their own accounting year, rather than the start of the tax year, to reduce compliance costs? Can we look again at ensuring that domestic LLPs are not at a disadvantage relative to non-UK LLPs?

When are the Government planning to carry out a formal post-implementation review of the changes? Will the review include a rigorous assessment of whether the expected yield has materialised? Like the hon. Member for Birmingham, Ladywood, I suggest that the proposals should perhaps be delayed to April 2015 so that we can get both the legislative approach and the drafting right, which would give LLPs time to adapt. To minimise compliance costs, will the Government consider applying the new rules from the start of the LLP’s accounting year, rather than from the start of the fiscal year?

In summary, this is great legislation, and it is right that we ensure that such loopholes are closed. My questions are purely probing in order to ensure that we do that as effectively as possible.

David Gauke (Conservative, South West Hertfordshire)

Clause 68 and schedule 13 make changes to prevent tax losses arising from disguising employment relationships through LLPs and from certain arrangements involving the allocation of profits and losses among partnership members. Amendment 15 seeks the publication of a report on the measure’s tax impact, and I will address that shortly.

The measure has two strands. The first concerns individual members of LLPs who are essentially employees. Such people are referred to in legislation as salaried members. Under existing rules, individuals who are members of an LLP are taxed as if they are partners in a partnership even if they are engaged on terms closer to those of an employee. LLPs can therefore be used to disguise employment and to avoid employment taxes, which results in unfairness and a loss to the Exchequer of income tax and national insurance contributions.

The second strand concerns the allocation of profits and losses between partnership members. Under partnership law it is not necessary for profits and losses to be shared among partners in proportion to a partner’s contribution to the partnership, which means that where partnerships consists of individuals and a company or, say, a trustee, there is scope to manipulate the allocation of profits and losses so that profits are taxed at a lower tax rate than they should be and losses are relieved at the highest income tax rate. A variation on that theme is where partners reduce their profit entitlement in return for a payment made by another member who is taxed more favourably on those profits. The measure is about reducing distortions between partnership types, thereby ensuring that disguised employment in LLPs and inappropriate partnership allocations to a company or similar vehicle do not create tax advantages.

Clause 68 and schedule 13 address the disguising of employment relationships in relation to salaried members of LLPs—that is part 1 of the schedule. Part 2 addresses tax-motivated allocations of profits and losses in mixed-membership partnerships, including LLPs. Part 4 addresses tax-motivated disposals of assets through partnerships, including LLPs. Part 3 introduces a new income tax collection mechanism for partnerships and LLPs operating as an alternative investment fund manager. I will now explain each of those aspects in a little more detail.

Part 1 of the schedule will ensure that a salaried member of an LLP is treated as an employee of the LLP for income and corporation tax purposes. Associated changes to the national insurance contributions rules have been made in the National Insurance Contributions Act 2014 and subsequent regulations. When the tax legislation relating to LLPs was introduced in 2001, it deemed all members to be self-employed. The new rules remove that automatic presumption, and individual members will be tested against certain criteria to determine whether they should be taxed as self-employed.

Broadly, the new rules seek to differentiate between an individual member of an LLP who has the characteristics of a partner and one who is tantamount to an employee. In order to do that, the legislation introduces three conditions. First, at least 80% of the individual’s reward for their services for the LLP is fixed or not generally subject to the overall profits and losses of the LLP; secondly, the individual does not have significant influence over the affairs of the LLP; and thirdly, the individual does not have significant capital invested in the LLP. If all three conditions are met, the individual will be a salaried member and will be treated as an employee of the LLP for tax purposes. These rules apply only to UK LLPs. Entities outside the UK that are broadly equivalent to a UK LLP do not benefit from the automatic presumption of self-employment and there is no evidence of their being used to disguise employment. The Government will, of course, continue to monitor this area and will act quickly if needed.

The change in part 2 of the schedule will affect partnerships, including LLPs, where the partners or members include both individuals and non-individuals, typically a company member of the partnership. Broadly, the new rules will prevent tax loss by reallocating excess profits allocated to a non-individual partner—say, a company partner—to an individual partner. That will remove the tax advantage achieved by that individual under an arrangement where the excess profits are taxed at a lower rate than if the individual, instead of the company, had received the profits. The rules will also deny certain income tax loss reliefs and capital gains relief for a loss allocated to an individual partner instead of a non-individual under avoidance arrangements.

Part 3 of the schedule addresses a particular issue for partnerships that manage alternative investment funds. The legislation will introduce a mechanism for members of such partnerships to allocate profits to the partnership where members cannot immediately access the profits because of requirements under an EU directive to defer remuneration of key staff of AIFM firms. The legislation will impose a charge to tax on such profits at the additional tax rate of 45% to be paid by the partnership. If the member subsequently receives the profits, the individual can claim a tax credit against the tax paid by the partnership up front. That mechanism will ensure that AIFM partnerships can comply with the new EU-wide regulatory rules without needing to turn to tax-motivated arrangements involving mixed membership partnerships.

Part 4 of the schedule would affect those who use partnerships to dispose of income streams or assets without triggering a charge to tax on income. The legislation will apply where a person disposes of all or part of an asset or income stream under arrangements intended to secure a tax advantage. The legislation will impose a charge to tax on income on the person making the disposal.

The majority of partnerships will not be affected by these changes as they are not LLPs employing salaried members or mixed membership partnerships involving tax-motivated arrangements. The partnerships affected are likely to be limited in number and are primarily large professional or AIFM partnerships.

The information sought in Opposition amendment 15 was published in the tax information and impact notes covering all four parts of the legislation in December last year. An updated note concerning the salaried member legislation in Part 1 was also published on 7 March 2014. The figures show that the measure is expected to raise about £3.3 billion over the next five years. The figures were subject to the scrutiny of the Office for Budget Responsibility and I can confirm that the figures were certified by the OBR following the rigorous procedures that the Government have put in place. Therefore the report proposed in the amendment is not necessary.

Let me deal with questions asked by the hon. Member for Birmingham, Ladywood and my hon. Friend the Member for Solihull. First, both asked about the salaried member legislation published last year, which is, it is argued, significantly different from the consultation proposals. I do not accept that view. The draft Finance Bill 2014 legislation published in December is based on specific statutory tests, as proposed in HMRC’s original consultation document.

As is usual, the original consultation proposals were updated, but that merely reflected the consultation responses received last year. A number of consultation respondents have supported the Government’s position. For example, both KPMG and the Alternative Investment Management Association provided positive endorsement while giving evidence to the House of Lords Economic Affairs Finance Bill Sub-Committee. The legislation has been further revised, taking into account suggestions received during the latest consultation, which was between December 2013 and February 2014. The final legislation was first published on 7 March, just before the publication of the Lords’ report on 11 March, and republished as part of the Finance Bill on 27 March.

Regarding how the new tests differ from the consultation proposals, the legislation sets out three requirements, all of which must be met before a member of a limited liability partnership can be classified as a salaried member, as I set out earlier. The requirements catch individuals who would, if engaged on similar terms by a company, be employees. I do not intend to repeat those conditions. Taken together, the requirements encapsulate what it means to be operating in a typical partnership. Those tests were developed to reflect the responses received during the consultation and they updated the initial proposals set out in the consultation document.

The question raised by my hon. Friend the Member for Solihull as to whether the Government are open to amendments ties in with the question whether the policy should be put back. Most LLPs have prepared for the change on the basis of the published proposals before the implementation date of 6 April 2014. Introducing further changes now will mean that the legislation could not have been introduced according to the previously announced timeline, which would not be in line with the Government’s principles of open and fair consultation. Of course, the Government keep all such matters under review for the future, but we will not be amending the legislation.

As for a post-implementation review, all tax policies are kept under review. There are no plans for a public review. We will ensure that the yield from the measure is monitored.

Regarding the argument that implementation should be delayed, I would make a similar point. We believe that we have given sufficient notice of the change, and it has been clear what the start date would be for some time. I have already touched on whether domestic LLPs are disadvantaged. The compliance costs for business are set out in the impact note. The vast majority of LLPs will not be affected. There will be some one-off costs as partnerships come to terms with the new rules, but they will not be significant. HMRC clearance processes will not be available until after Royal Assent, but that is the normal process.

I hope that the clause will stand part of the Bill.