Finance Bill

Public Bill Committee, 10 June 2014.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules) - Clause 68 - Partnerships

Martin Caton (Labour, Gower)

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

Clause stand part.

That schedule 13 be the Thirteenth schedule to the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

It is a pleasure to welcome you back to the Chair, Mr Caton, as we continue our deliberations. I am sure that all members of the Committee feel like we have never been away, but we are now in the final stretch of our consideration of the Bill and I am sure that we will continue to enjoy ourselves just as much as we have done up to this point.

The Minister has allayed some of the concerns about the clause that had been raised by stakeholders and answered many of my questions. Given his assurances, I beg to ask leave to withdraw the amendment.

Clause 69 - Transfer pricing: restriction on claims for compensation adjustments

Shabana Mahmood (Labour, Birmingham, Ladywood)

The clause deals with transfer pricing, which is an integral part of ensuring fairness in the tax system. It is designed to iron out tax inconsistencies that arise when transactions take place between connected parties. In essence, the rules exist to ensure that the right prices are charged between connected parties on international transactions, although they also apply to transactions in the UK. When transfer pricing rules are utilised—when transactions have not been carried out at arm’s length and when a UK tax advantage has accrued—the effect is to increase one party’s profit. It is sometimes possible for the other party involved in the transaction to make a claim to reflect the same price, which is known as a compensating adjustment. At present, companies and individuals can claim compensating adjustments.

One unintended consequence of the compensating arrangements has been that although, on one side of the arrangement, the taxable profit has increased, on the other side, the taxable income at the higher rate has been reduced without affecting the cash position of either party. Individuals are therefore able to extract income from their businesses at the corporate tax rate rather than the income tax rate.

The technical note on the clause states:

“Large partnerships often employ their staff through a separate service company, which the partnership owns. This arrangement can be used for a number of reasons not related to tax. However, by choosing not to pay an appropriate fee to the company for providing this service, the partnership can activate the tax rules to gain an advantage. HMRC is aware that the structure has been promoted as a method to reduce tax liability for smaller partnerships.”

The clause is therefore designed to restrict the use of compensating adjustments when they generate such income tax advantages. Specifically, the main change will prevent persons other than companies within the charge to income tax from claiming a compensating adjustment where the counterparty is a company. That means that if the compensating adjustment claim is denied but the claim would have related to excess interest paid by the counterparty, the excess interest—over an arm’s length amount—will be treated for income tax purposes as a dividend rather than interest, and will be taxed at dividend rates rather than at rates applicable to interest. The changes will take effect in relation to amounts that are referable to times on or after 25 October 2013. Any amounts accruing before that time, whether interest or service fees, are outside the scope of the clause.

We support measures to prevent schemes whose sole purpose is to avoid paying tax, so we support the clause. However, I want to ask the Minister a small number of questions. In the document on compensating adjustments by Her Majesty’s Revenue and Customs that was issued in October 2013, HMRC estimated that receipts would increase by about £70 million per annum. However, in the autumn statement, much higher figures were given, with the post-behavioural Exchequer impact in 2015-16 estimated at £125 million. Will he explain the difference between those two sets of figures and tell us the methodology used to calculate them?

Will the Minister tell us his estimate of how many of these arrangements are seen every year? Additionally, I would be grateful if he could tell us how HMRC became aware that structures promoting the reduction of tax liabilities for smaller partnerships were being set up and whether he plans to review the measure to ensure that no other avoidance schemes flourish as unintended consequences of clause 69.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship once again, Mr Caton. As we have heard, clause 69 makes changes to prevent individuals from exploiting transfer pricing legislation to generate an overall reduction in tax liability.

Transfer pricing legislation is designed to ensure that connected parties transact with one another at a market arm’s length rate. Although the main purpose of the legislation is to ensure that the UK receives a fair profit return on cross-border transactions, it also applies to transactions conducted between connected persons wholly within the UK.

Within the UK, if the legislation increases one party’s profits, the person at the other end of the transaction may claim a compensating adjustment, which has the effect of reducing that person’s taxable income by an amount equal to the adjustment. Wealthy individuals and large partnerships have been using the mechanism to take income from companies that they control without paying the full amount of income tax. That is achieved because the transfer pricing and compensation adjustment rules increase the profit taxable at lower corporation tax rates, but reduce the income taxable at the higher rate of income tax, which is currently 45%. The cash movement, however, is unchanged. It stays with the individuals, so they effectively obtain income that would normally be taxed at personal rates of income tax, but pay only the corporation tax rate.

The clause will remove individuals’ ability to claim compensating adjustments when the counterparty to the transaction is a company. Some modifications apply for payments of interest. When the compensation adjustment claim is denied but the claim would have related to excess interest paid by the counterparty, the excess interest over the arm’s length rate will be treated for income tax purposes as a dividend rather than interest, which means that the excess will be taxed at dividend rates, rather than rates applicable to interest.

The clause will mainly affect individuals who are making loans to a company not on arm’s length terms. Affected businesses will include those in private equity, but the measure is not targeted at that sector, and the legislation will affect a range of private companies. It will also affect companies that are under-remunerated by large professional partnerships for the services that the company performs for the partnership. The measure is expected to yield £530 million over the next five years.

The hon. Lady referred to the changes in yield numbers. The revenue estimates are subject to the scrutiny of the Office for Budget Responsibility. I confirm that the figures were certified by the OBR following the rigorous procedures that the Government have introduced. The initial estimates were revised upwards following further scrutiny, which is why we have the present number.

How did HMRC become aware of the arrangements? Marketing material was produced by some of the larger accountancy firms, which resulted in greater scrutiny by HMRC. A significant number of taxpayers have entered such schemes. There is also evidence that the schemes are increasingly being marketed as a way to avoid tax. If the Government do not act, there will be increasing losses of tax and an increased risk to the Exchequer.

The clause will prevent the compensation adjustment rules from being used to avoid tax. It supports the Government’s objectives of fairness in the tax code and I hope that it will stand part of the Bill.

Clause 70 - Excise duties and other taxes

Catherine McKinnell (Labour, Newcastle upon Tyne North)

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

We come to part 2 of the Bill. Clause 70 is the first in a series of clauses dealing with excise duties and other taxes. It makes several changes to alcoholic liquor duties. It cuts the rate of duties on beer, freezes the rates of duty on spirits and most ciders, and removes the duty escalator for wines and high-strength sparkling ciders. The tax information impact note estimates that the changes will cost £290 million in 2014-15, rising to £325 million in 2018-19.

As hon. Members will no doubt be aware, rates of duty on alcoholic drinks have been the subject of vigorous campaigning by various industries and their representative organisations in recent months, largely as a result of the Government’s decision to cut beer duty—and it was only beer duty—in last year’s Budget. The British Beer and Pub Association called for another cut in beer duty further to support and protect jobs in the industry. The Wine and Spirit Trade Association, as part of its “Call time on duty” campaign, called on the Government to provide similar treatment for wine and spirits. While wine has not received duty cuts or freezes similar to those for beer and spirits, the association believes that its proposals would protect and even create thousands of jobs. Indeed, the Opposition have long called on the Government to conduct a proper and thorough review of alcohol duties, and their impact on respective industries, especially in light of the coalition’s 2011 decision to increase VAT, which added 6p to the price of a pint of beer alone.

Richard Fuller (Conservative, Bedford)

Given what the hon. Lady is saying, does she agree that the previous Labour Government’s decision to introduce a beer duty escalator was a mistake?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

We are discussing the amendments and clauses in front of us today. I am pointing out that the Opposition tabled amendments to address this point to various Finance Bills, especially last year’s, when we asked the Government to undertake a thorough review of the impact of these duties on the variety of industries that rely on a fair duty system, especially the Scotch whisky industry, which has campaigned against the rise in duties. The Government’s failure to give fair treatment across the board has affected that industry’s sales and levels of employment. The Opposition have consistently called on the Government to conduct a thorough review into the impact of duty rates on business and consumers, and I have tabled a number of written parliamentary questions to try to get answers on these issues.

In light of the assurances given by the previous Economic Secretary to last year’s Bill Committee, it would be helpful if the Financial Secretary to the Treasury would outline the context to the Government’s decision to cut these duties in this year’s Bill. Will she outline the impact of the cut in beer duty last year on the beer and pub trade in the UK? How many jobs have been created as a result of that duty reduction?

Ian Mearns (Labour, Gateshead)

I should declare an interest, as I have been known to have the occasional pint of beer. However, that is a common interest among many members of the Committee, so it should not be too influential.

The way in which the 1p reduction in beer duty has been greeted by some people takes the change out of context. I have bought beer in a number of different places at different prices. For instance, in Gateshead, I can still purchase a pint for under £2, but last night I went to a hostelry near to my flat where it was £4.10, so the 1p reduction in duty was like a double-glazing salesman saying, “Buy 410 and get one free.”

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend makes a valuable point and I am pleased that he has declared his interest in this matter. He pre-empts another question that I have for the Minister: how many customers and taxpayers have seen a 1p reduction in the cost of their pint down at their local? That was promised as part of the price reduction, but the tax information and impact note expresses a degree of uncertainty, so more clarity would be useful.

I want to turn to the important issue of alcohol duty fraud and the illicit market. HMRC now produces annual estimates of the tax gaps across a range of taxes and excise duties. According to its latest estimates, which were published last September, the mid-point estimate for the alcohol tax gap in 2011-12—the latest year for which data are available—is just over £1 billion, including VAT losses. However, at the upper estimate, the gap for 2011-12 is just under £2 billion. The majority of the tax gap stems from illicit beer, which HMRC believes accounts for between £550 million and £750 million in lost Exchequer revenue. A 2012 report from the Public Accounts Committee seems to support that view. It also found that the main source of lost revenue stems from beer produced in and initially exported from the UK, but then illegally re-imported into the UK without the duty being paid. The report suggests that of the 450 million litres of beer exported to Europe each year, 180 million litres are then re-imported illegally.

The Government consulted on measures to tackle alcohol fraud on two separate occasions in 2012 and 2013. In 2012, the consultation examined options for strengthening existing legislation and enforcement measures while proposing schemes to clamp down on fraud in wholesale and excises businesses. The proposals included fiscal marks on beer containers and supply-side legislation requiring track and trace systems. However, these measures were not taken forward by the Government, as was made clear in a written statement in July 2013 by the then Economic Secretary to the Treasury.

In a written statement, the Government committed to continue to explore track and trace technologies. Will the Financial Secretary confirm whether they have done that, and if we are any closer to seeing technologies implemented in the supply chains to protect those vital revenues? We are now almost two years on from the commitment made in the written statement, so presumably new technologies that could prove effective and that would be practical to implement are out there.

There was an assumption in the industry that beer fiscal stamps would place an undue burden on producers and importers, and would therefore not be permissible under EU law. The Financial Secretary recently told me in an answer to a written parliamentary question that the cost to apply stamps to cans and bottles at the time of manufacture could be a fraction of a penny per container, but could be much higher for imports. The Treasury estimates that beer fiscal stamps would involve a £6 million set-up cost and £31 million annual cost to the industry. It is worth noting that, according to the British Beer and Pub Association, 82% of beer sold in the UK is produced in the UK, meaning that a relatively small proportion of the beer sold in the UK would be subject to higher costs.

Others have cited the success of fiscal stamps on spirits, which were introduced by the previous Labour Government in 2006. Of course, that system is still in force today, and it appears to have had a positive impact on illicit sales. Although HMRC does not believe it is possible to assess the specific effect of duty stamps in this case, there was a significant fall in revenue loss over the same period. Given the far more significant beer duty tax gap, do not Ministers believe that similar measures might well be equally effective? It will be helpful if the Financial Secretary is able to confirm whether the estimate of annual costs to the industry of £31 million takes account of the disproportionate costs for imported beer producers, as opposed to domestic producers.

Last year, the Government consulted on further steps they and HMRC could take to tackle alcohol fraud, with three clear outcomes becoming apparent, which I am sure the Minister will mention. All three measures were announced in the autumn statement 2013 and reconfirmed in Budget 2014, with the Government estimating that the wholesaler registration scheme will cost about £235 million when it is implemented in 2016. I recognise that Ministers want to carry out rigorous pre-registration checks first, but with wholesalers clearly already struggling with competition from illicit traders, the registration scheme, regarded by the Government as critical to anti-fraud measures, is needed now, not in three years’ time. Given that the alcohol tax gap already stands at between £1 billion and £2 billion, by HMRC’s varying estimates, could the Minister explain why the Government’s flagship scheme to tackle alcohol fraud is not to be fully implemented until 2017?

The joint alcohol anti-fraud taskforce, which is made up of senior officials from HMRC, Border Force, the Home Office, Trading Standards and key industry stakeholders, held its inaugural meeting on 16 January this year. The Government said at the time:

“This will be followed in 2014 with the establishment of expert working groups to progress areas of concern.”

Will the Minister update the Committee on officials’ progress in setting up expert working groups and highlighting or progressing areas of concern? What areas have the Government identified to focus on? The taskforce’s stated aim is to prevent fraud and make it more difficult for fraudsters to operate through improved intelligence and information sharing. Is the Minister able to elaborate on the taskforce’s work to date, perhaps providing examples of where information sharing and intelligence gathering have taken place? That would be helpful to the Committee.

Richard Fuller (Conservative, Bedford)

It is a pleasure to serve under your chairmanship, Mr Caton. If the Committee will indulge me for a few minutes, I wish to add a couple of words in support of beer and of Her Majesty’s Government.

I think it was my right hon. Friend’s predecessor as Financial Secretary, now the Secretary of State for Culture, Media and Sport, who made the first strike on behalf of beer drinkers and employees of the brewing industry last year. My right hon. Friend has continued that tradition in this year’s Budget, and I commend her for her stance on the principle of beer duty. Behind that is a more substantive issue, which is the principle of taxation escalators, much beloved by the Labour Government and undermined and abolished by the coalition Government. I wonder, in a free society, what is the merit of a Government deciding to increase tax automatically year after year on basic products—necessities for some people in their everyday life. We saw that in both fuel duty and beer duty. It seems to me an unsound principle of public finance to make projections on the assumption that Government can go on increasing taxation on ordinary people’s everyday expenditures in order to fulfil their ambitions. Judging by what we have heard from the Opposition in this debate and elsewhere, I fear that, unfortunately, that principle will be reintroduced should they ever get back into power.

Chris Williamson (Labour, Derby North)

I am interested in the hon. Gentleman’s comments about increasing taxes on everyday expenditure for ordinary people. Does he therefore disagree with the Government’s decision to ratchet up VAT?

Richard Fuller (Conservative, Bedford)

The hon. Gentleman makes a legitimate point, but he did not listen to what I said. What I said was that the principle of automatic annual increases in taxation—that a Government in a free society should be able to set a direction of taxation that says, “For us to meet our expenditure commitments in future years, we shall now say that every year the rate of taxation shall increase”—is of questionable intellectual merit. To reply to his question, if, when the Government had to restore our public finances from the disastrous deficit that the previous Government left, they had said that we would increase VAT—the tax that he chose to highlight—year on year, his point would have been valid, but that is not what the Government decided to do.

Nicholas Dakin (Labour, Scunthorpe)

The hon. Gentleman is being typically robust. Would he like to get rid of the tobacco accelerator as well?

Richard Fuller (Conservative, Bedford)

The hon. Gentleman makes a good point, which I am trying to explore. I would be interested to know whether we could have a debate on that matter, Mr Caton. If we cannot, because it is not in this Bill, perhaps we should do so elsewhere.

I ask the hon. Gentleman to focus on the principle, though. The previous Government got the country’s finances into a terrible state. Underpinning some of that were certain assumptions made—[Interruption.]. Labour Members shake their heads, but I think the British public know why they have gone through all the traumas of the past few years: it is because of the mismanagement of the economy in the period up until 2010. That is clearly understood across the country. The point I am trying to make, regardless of party, is that it is important that, when we set the public finances, we stick to sustainable principles, and I am not sure that to assume increases in the rate of taxation year on year is a sound principle of public finance.

Ian Swales (Liberal Democrat, Redcar)

Does the hon. Gentleman share my concern that a pint of beer would cost 8p more now if this Government had kept the escalator left behind by the previous Government? Those Members who deride the 1p cut in duty are forgetting what the effects of the escalator would have been.

Richard Fuller (Conservative, Bedford)

My hon. Friend’s comment stands on the record. I have made my point about the escalator.

The other aspect of this debate is jobs. I am proud to represent Bedford and proud that one of the largest local employers in my constituency is Charles Wells, which is the largest family-owned brewery in the country and is recognised by all political parties as a significant company. On the opening day of the 2010 election campaign, my right hon. Friend the Chancellor came to Charles Wells to look around. Then the Secretary of State for Business, Innovation and Skills came to Bedford—no doubt to do some polling research to see what the chances were for our Liberal Democrat mayor. Coming in third, as usual, the Leader of the Opposition visited recently to talk about apprenticeships. Jobs in my constituency are the other benefit of the measure the Government have proposed. The impact will be not just on everyday family budgets and beer drinkers, but on jobs in my constituency.

I commend my right hon. Friend the Financial Secretary and ask her whether she shares my belief in the principle of looking for savings wherever we can—in beer duty and other duties—and getting away from the principles left by the previous Government. Perhaps she could address that in her comments.

Nicky Morgan (Conservative, Loughborough)

It is a pleasure to serve under your chairmanship this morning, Mr Caton. The clause sets out the alcohol duty rates from 2014-15. It takes a penny off the tax on a typical pint of beer, freezes the duty on ordinary cider and freezes the duty on spirits to help the Scottish whisky industry, and limits the increase on wine duty to inflation. As we have just heard—my hon. Friend the Member for Bedford made the case powerfully—with these changes we have stopped the previous Government’s alcohol duty escalator and are helping the pub industry, which plays an important part in British cultural life.

About 15 million people across the country visit the pub weekly, but the industry has faced difficulties. Pubs are important community assets that promote responsible drinking, but about 10,000 have closed in the past 10 years, so at Budget 2013 the Government took decisive action to help the pub industry. Given that nearly two thirds of the alcohol served in pubs is estimated to be beer, the Government took a penny off the tax on a typical pint of beer. The hon. Member for Newcastle upon Tyne North asked what that means in real terms. The British Beer and Pub Association has made clear how that decision has helped the pub industry during the past year: 89% of its members reduced or froze their prices, 76% increased investment and 51% employed more staff.

The clause reinforces the Government’s commitment to help the pub industry. It cuts general beer duty by 2% to reduce the tax on an average strength pint of beer by 1p. Before last year, beer duty had not been cut for 40 years. The Government cut it by a penny last year and by another penny this year. A typical pint of beer is now 8p cheaper—as we heard from my hon. Friend the Member for Redcar—than it would have been under the previous Government’s duty plans.

Chris Williamson (Labour, Derby North)

Will the Minister concede that it is increasingly more difficult for those who drink—I should declare I have been teetotal since the age of 17—to afford a pint of beer, even with the minuscule reduction, because they are on average £1,600 a year worse off? Those are the figures and they prove themselves, I am afraid.

Nicky Morgan (Conservative, Loughborough)

Those are the figures from the Labour Whips Office. We have previously argued about this on the Floor of the House and probably in this Committee. The figure of £1,600 does not reflect the increase in the personal tax allowance or the changes to the benefits system. We have heard that in Gateshead, a pint of beer can cost less than £2, whereas in Westminster it could cost quite a lot more.

Ian Mearns (Labour, Gateshead)

It is possible.

Nicky Morgan (Conservative, Loughborough)

It is possible but the point is, as my hon. Friend the Member for Bedford mentioned, the previous Government’s continued duty escalator would have continued ratcheting up the price of a pint of beer. Under this Government, the typical pint of beer is 8p cheaper than it would have been under the previous Government’s plans. Brigid Simmonds, the chief executive of the British Beer and Pub Association, has noted that,

“over 7,000 jobs over two years, mostly jobs of younger people in Britain’s pubs.”

will be protected.

To ensure the tax on a typical low-strength beer is also cut by 1p a pint, low-strength beer duty is being reduced by 6%. The duty on high-strength beer has two parts: general beer duty and an additional duty. The additional duty on high-strength beer increases by 3.9%, so the clause partially offsets the reduction in general beer duty, reducing the overall duty on high-strength beer by 0.75% and the tax on a typical pint of high-strength beer by 1p. Those changes to beer duty help to achieve the Government’s aim to increase the incentives to produce and consume low-strength beer.

That will specifically help our traditional, drink-led pubs, but the Government are keen to provide support to pubs where the focus on beer is less strong, such as food-led pubs, which tend to sell more wine and spirits than others. The clause stops the previous Government’s duty escalator and limits the duty increase on most wine, made-wine and high-strength sparkling cider to RPI inflation. That keeps the duties on beer and wine broadly similar, as required by EU law. In keeping with EU legal requirements, the duty rate on wine of more than 22% alcohol by volume continues to be the same as on spirits. The clause also freezes the duty on most cider, so that a typical litre of cider is now 6p cheaper than under the previous Government’s duty plans. The west country, home to many of the country’s orchards, was hit hard by winter’s bad weather. This change will help the cider industry. The duty rate on high-strength sparkling cider continues to be the same as equivalent strength sparkling wine, complying with EU legal requirements.

The Scotch whisky industry is one of the great British success stories. Its exports were estimated to be worth more than £4.2 billion in 2012—nearly a quarter of UK food and drink exports. That is why it is important that the Government support this great industry where we can. Earlier this year, the Government introduced the Scotch whisky verification scheme, which will help to protect the integrity and high reputation of the Scotch whisky brand at home and abroad. The domestic market remains important, though, given that it is the third largest market for Scotch whisky. The freeze in spirits duty will cater further support to the Scotch whisky industry. It means that a 70 cl bottle of whisky is now 42p cheaper than it would have been under the previous Government’s duty plans. David Frost, chief executive of the Scotch Whisky Association toasted the Government’s decision, saying:

“This show of support for distillers from the Coalition Government will be warmly welcomed across the Scotch Whisky industry.”

The changes to alcohol duty rates outlined in the clause ensure that responsible drinkers do not continue to be penalised by the alcohol duty escalator inherited from the previous Administration. However, the Government recognise that not everyone is a responsible drinker and we have taken a targeted approach to tackle alcohol-related harms, as set out in the Government’s response to the alcohol strategy consultation in 2013, ranging from banning the sales of alcohol priced below duty plus VAT, to licensing changes to help to tackle irresponsible alcohol consumption.

I will turn, briefly, to the question from the hon. Member for Newcastle upon Tyne North about fraud and the actions of HMRC. The Government recognise the importance of tackling alcohol fraud and will increase HMRC’s ability to remove illicit alcohol from the market by introducing a wholesaler regime, as she outlined, which is to take effect in 2016. The reason that it is taking between the announcements now and 2016 is that HMRC needs time to set up the scheme and firms need time to register with HMRC. Although from 2017 everyone will need to be registered, the scheme starts from 2016. A requirement for alcohol traders to take reasonable steps to ensure that their suppliers and customers are legitimate will take effect later this year.

The hon. Lady mentioned the joint alcohol anti-fraud taskforce, whose first meeting I attended. The taskforce aims to tackle alcohol fraud by bringing together law enforcers, trade bodies and key alcohol industry figures. She asked about information sharing, and the taskforce is looking at that. The industry and Government are working together to explore the options available. She understands that I cannot go into the details of how information and intelligence are to be shared—if I put that on the public record, there would not be much point in trying to catch those who are determined to commit fraud—but one of the taskforce working groups is looking at information sharing.

The hon. Lady asked about fiscal stamps. Responses to our consultation suggest that fiscal stamps could have a disproportionate cost for firms, so the Government are instead taking proportionate action through the wholesaler registration scheme, but we continue to keep the introduction of further measures such as fiscal stamps under review. I should point out that wholesalers are currently the only unlicensed part of the supply chain. She also asked about track and trace. That is under review, but the wholesaler registration scheme is where efforts lie at the moment.

My hon. Friend the Member for Bedford asked about future policy. Obviously I cannot commit on that, but we keep all taxes under review and this Government have shown clearly with this and other measures that, where we can help successful industries—our pubs are a vital part of our communities and I have mentioned the critical role of the Scotch whisky industry in exports and of the cider regime in particular parts of the country, especially the west country—we will always do what we can to help industries and to help businesses to flourish and to take on employees. That is the guiding light of our economic plan.

Ian Mearns (Labour, Gateshead)

Does the Minister accept that the whisky or spirits duty for domestic markets still stands at about 79p in the pound? We have talked about taking away the escalator and freezing the duty, which has been welcomed by the industry, but at 79p in the pound it is still extremely high for the domestic market, compared with overseas comparators.

Nicky Morgan (Conservative, Loughborough)

I thank the hon. Gentleman for that question. Yes, he will not be surprised to hear that that point has been made to me, in debates in this place and when I have journeyed to Scotland. The point is that this year’s duty freeze sends a clear signal about our support for the industry. More can always be done on any change made by any Government in any Budget announcement, and there will always be people who ask for more, but we took a decision this year on what was manageable within the economic constraints left to us as we sort out the economic situation of this country.

The clause reaffirms the Government’s commitment to supporting community pubs, the thriving Scotch whisky industry and responsible drinkers. I urge the Committee to let the clause stand part of the Bill.

Clause 71 - Rates of tobacco products duty

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I beg to move amendment 24, in clause 71, page 61, line 2, at end insert—

‘(3) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish a report on levels of revenue from the rates set out in this section.

(4) The report referred to in subsection (3) above must in particular examine—

(a) changes in revenue due to illicit market share,

(b) action to mitigate any such changes in revenue.

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

Martin Caton (Labour, Gower)

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

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause deals with rates of tobacco duty. In Labour’s final Budget, the then Chancellor announced that tobacco duty would rise by 1% above inflation in that year, 2010, and by 2% above inflation thereafter for the following four years. That policy has been maintained by this Government, including in the clause: indeed, in this year’s Budget, the Chancellor announced that tobacco duty rates will continue to rise by 2% above inflation each year between 2015-16 and 2019-20, although such provisions will continue to be made in each and every Finance Bill.

I am interested to see whether the hon. Member for Bedford in particular will support the Opposition amendment, which asks the Chancellor of the Exchequer to undertake a review of the levels of revenue set out. Our focus is on illicit market share, but the hon. Gentleman could use this opportunity to raise the inquiry into the duty escalator that he seeks from the Government.

Research has consistently shown a link between the price of tobacco products, levels of demand and public health issues, with successive Governments therefore maintaining high tobacco duty rates to discourage the take-up of such habits, particularly by children. It is right, of course, that the Government maintain this policy, but aside from the changes to tobacco duty that I have just set out, the Chancellor’s Budget report also announced the Government’s intention to consult on other measures related to tobacco duties, both of which are to commence this summer. First, the Government intend to consult on a minimum excise tax. Secondly, they intend to consult on

“a range of measures to strengthen its response to tobacco smuggling and improve anti-forestalling controls”,

with a view to legislating in next year’s Finance Bill. Perhaps that is a tacit concession that the Government’s actions to date have done little to tackle this extremely important problem and have perhaps fallen short of initial hopes.

It is worth noting that both of those issues were raised by my hon. Friend the Member for Nottingham East during last year’s Finance Bill Committee: specifically, duty stamps to tackle fraud and a minimum excise tax. Both received particularly vague responses from the then Economic Secretary; none the less, we now find the Government turning their attention once again to tobacco duty fraud, which is also the subject of our amendment 24.

The amendment calls on the Government to take account of changes in revenue due to increasing levels of illicit tobacco trading, as well as, of course, exploring what more the Government can do to mitigate revenue losses, particularly in the light of the Government’s disappointing results to date. HMRC estimates that revenue losses from tobacco smuggling and other sub-economy activities in 2011-12 totalled £1.3 billion. As with HMRC’s alcohol tax gap estimates, that is HMRC’s mid-point estimate. If we take its upper estimate, revenue losses from both cigarettes and hand-rolled tobacco, inclusive of associated VAT losses, could be as high as £2.4 billion. Although that is marginally down on the previous year, it still represents more than £1 billion in lost tax revenues, which is clearly a critical amount in these austere times.

Although HMRC estimates the illicit market share for cigarettes as 7% in 2011-12, the estimated illicit market share for hand-rolling tobacco in the same year was a staggering 35%. Indeed, it is also worth pointing out that tobacco duty receipts have recently been coming in lower than the OBR’s—and presumably the Treasury’s—forecasts. The OBR revised down its forecasts for tobacco duty receipts in its December 2013 report by between £100 and £300 million per year over the next few years, but it has since transpired that those forecasts, reiterated by the OBR in the Budget in March this year, also overestimated tobacco duty revenue.

HMRC’s statistics, published for the most recent year, show that tobacco duty receipts totalled £9.5 billion, yet at the Budget the OBR still expected £9.7 billion in receipts. In fact, HMRC’s latest statistics show that revenue from tobacco duties has actually fallen by more than £100 million compared with the previous year for the first time since 2005. What does the Minister make of these changing trends and the fact that the OBR’s and the Treasury’s forecasts have overestimated tobacco duty revenue? Does she believe they are a result of increases in illicit tobacco products on the market, or are there other reasons such as an increasing take-up of e-cigarettes, or is there a wider—and welcome—trend of people giving up smoking, and fewer people starting to smoke?

Of course, the issue of the illicit tobacco trade does not have consequences only in terms of revenue losses. We also know that illicit cigarettes carry serious public health risks, as well as putting the livelihoods of reputable retailers at risk through being undermined. A recent report in one of my local newspapers reported that illicit tobacco traders often target children, therefore circumventing both excise duty and age of sale legislation. The Chronicle, my local paper, reported that the North East Trading Standards tobacco control project manager, Richard Ferry, pointed out that pubs, shops and private homes have been used as “tab houses” to sell cigarettes for as little as 25p, which should obviously be of concern to any Government.

By way of background, the Government launched the “Tackling Tobacco Smuggling” strategy in April 2011. According to the Public Accounts Committee’s report on HMRC’s progress to date in tackling tobacco fraud, published last October, HMRC planned to use the additional investment that the Government announced in the 2010 spending review to deliver five projects with a total expected benefit of £1.4 billion by March 2015, but the Committee concluded that three of the five initiatives “yielded nothing” by March 2013. In one example it highlighted, officers were working overseas, but HMRC realised that such powers could not be exercised abroad, so revenue yield from the project was reduced from £465 million to £100 million. The PAC concluded that most of the extra £25 million that the Government committed to reinvest in 2010 was spent on business-as-usual tasks, rather than new initiatives.

The National Audit Office was equally damning. It concluded that HMRC is “unlikely” to achieve its target of £1.4 billion in revenue protection, citing the fact that progress by the end of 2012-13 was two thirds of the expected yield. The fact that HMRC is one of the only tax agencies in the world to publish tax gap estimates is to be applauded, but the PAC and NAO are concerned that there remain “significant inaccuracies” in its estimates of the impact of its work. Does HMRC agree with the NAO's and the PAC’s assessments that the Government’s strategy to date has fallen short of the mark in tackling tobacco fraud and is therefore unlikely to recover more than a fraction of the anticipated £1 billion or so in duty revenue?

No doubt Ministers intend to publish their views on new measures in the forthcoming consultation, but I would be grateful if the Minister set out the Government’s views on some of the measures that we discussed previously in relation to alcohol, such as fiscal marks and track and trace technologies. Do the Government intend to consult on fiscal stamps as a measure to tackle this type of fraud? In last year’s Finance Bill Committee, the then Economic Secretary suggested that the Government were in talks with the EU Commission about track and trace technology and how it might work in practice. It would be helpful if the Minister could update the Committee about those discussions.

I would like to pick up on one aspect of the anti-tobacco fraud strategy. Close working with local authorities and trading standards to tackle fraud is part of the Government’s “Closer Working Protocol”, whose stated aims are to

“implement effective examples of joint-working”

and improve relationships to ensure better enforcement. In May 2013, my local council, Newcastle city council, led the way by creating a declaration committing it to take comprehensive action to address the harm from smoking. Although it covers a range of issues regarding smoking and public health, it acknowledges the role of illicit tobacco in funding criminal activities and giving children access to cheap tobacco.

The declaration is a hugely positive step forward in the fight against illicit tobacco and was subsequently endorsed by various Government agencies, including the Department for Health, as the then public health Minister made clear in a public letter last June. It has now been accepted by 50 local authorities across England, according to the Smokefree Action website. The declaration seeks to

“Protect…tobacco control work from the commercial and vested interests of the tobacco industry by not accepting any partnerships, payments, gifts and services, monetary or in kind or research funding offered by the tobacco industry to officials or employees”.

That is in line with the UK’s obligations under article 5.3 of the World Health Organisation’s framework convention on tobacco control. The Trading Standards Institute clarified that position by making clear that although it is fully committed to meeting that obligation,

“some limited and transparent engagement with the tobacco industry”

is necessary to effectively tackle the illicit tobacco trade. Indeed, Newcastle trading standards has worked with tobacco manufacturers in test purchasing operations to root out what are termed “illicit whites”—cigarettes manufactured purely for the sub-economy market, as my local paper reported.

Considering that the Department of Health has fully endorsed that local strategy, I would be interested to hear from the Minister whether HMRC has had any input into that and whether it considers that joint working with tobacco companies is necessary to combat the illicit trade. Equally, I would be interested to hear what work HMRC is doing with the Department of Health, perhaps alongside Trading Standards, on the impact of the declaration and the wider local government strategy on the level of counter-fraud activity.

Ian Mearns (Labour, Gateshead)

In our neck of the woods, there is a concern that tobacco that has been exported from this country and then re-imported is getting on to the streets, but without the duty being paid to Revenue and Customs. There is a deep suspicion in many people’s minds—particularly trading standards officers I have spoken to—that the tobacco industry itself is behind that. There is a suspicion, but it is very difficult to prove.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I have heard those views expressed. There is a difficult balance to strike, in that working with the tobacco industry can help with intelligence-sharing and tackling illicit, anti-trade activity, but that might not stack up with the health imperative to live up to the declaration I outlined earlier, which many local authorities have now signed up to. I would be interested to hear what HMRC and the Government’s approach is, and whether collaborative work is being done with the Department of Health, so that it can become a national way forward, rather than simply being taken up on a local basis.

To conclude, the Opposition’s amendment 24 calls on the Government to place a renewed focus on the impact of tobacco duty rates on the illicit trade and associated Exchequer revenue losses. Estimated losses from the illicit tobacco trade could be as high as £2.4 billion, according to HMRC’s upper estimates, so it is critical that these matters are kept under constant review, particularly as the Government’s efforts since 2010 appear to have fallen short of the mark. For that reason, I urge hon. Members to back the Opposition’s amendment to place a renewed focus on tobacco fraud and tackling this important issue on the Government’s agenda.

Nicky Morgan (Conservative, Loughborough)

Clause 71 makes changes to ensure that the tobacco duty regime continues to work as part of the Government’s wider health agenda to reduce smoking prevalence—something we can all agree on, on both sides of the House. The clause implements tobacco duty increases of 2% above RPI inflation.

The Government are committed to reducing smoking rates, especially among young people. Smoking is the largest cause of preventable illness and premature death in the UK, killing half of all long-term users. There is no such thing as safe smoking. Treating smoking-related illnesses is also a drain on our public health services, costing the NHS approximately £2.7 billion in 2006-07. Reducing the affordability of tobacco products through taxation is acknowledged to be very effective in reducing smoking prevalence.

Clause 71 increases the duty rate on all tobacco products by 2% above inflation. The change came into effect at 6 pm on 19 March, adding 24p to a packet of 20 cigarettes and 23p to a 25-gram packet of hand-rolling tobacco. Research has consistently shown that the price of tobacco products affects demand. By increasing prices through taxation, we hope to strengthen the Government’s wider health agenda to reduce smoking prevalence, which, as I said, will reduce health inequalities and reduce the cost to the NHS of treating smoking-related illnesses. Research also shows that, in addition to establishing high tobacco duty rates, maintaining high rates is also important in reducing smoking prevalence. That is why annual duty increases of 2% above inflation will continue until the end of the next Parliament.

Let me turn to the Opposition’s amendment 24, which would require the Government to publish a report on the levels of revenue from the duty rates set out in the clause, the changes to revenue due to illicit market share and any relevant actions to mitigate that. As we have heard, it is another Opposition-sponsored review. The Government do not want just to keep having reviews, but actually to make some changes that will have an effect. We want action. I wonder whether all these reviews will be chaired by redundant Labour MPs after the next election. [Interruption.] I just wanted to wake the Committee up. The Government already publish the information, so the amendment is superfluous.

The forecasted revenue impacts of the tobacco duty announcements made in the Budget were published in the Budget document. In addition, HMRC’s annual report, published each July, sets out the tobacco products duty revenue raised in the previous year. Illicit market share is documented in HMRC’s annual tobacco tax gap estimates. The 2013-14 estimates are due to be published in autumn 2014. HMRC and Border Force’s work to combat the illicit trade is set out in the “Tackling tobacco smuggling” strategy, which was first published in 2000 and updated in 2006, 2008 and 2011. The Government are undertaking a joint review of the strategy, which we aim to publish later this year.

It is clear that the information requested by the amendment is already provided by the Government. I understand, however, the shared desire of the Committee to tackle the illicit tobacco trade and ensure that smuggling does not undermine the health and revenue benefits of duty increases. HMRC and Border Force have an effective strategy in place to tackle illicit activity and, as documented in the reports I have just referenced, we have seen a long-term decline in the illegal trade. The illicit market has reduced from 22% to 9% for cigarettes and from 61% to 36% for hand-rolling tobacco since the launch of the first anti-fraud strategy. To further build on that success, the Government will consult on a package of measures to strengthen the response to tobacco smuggling, which will ensure that HMRC and Border Force continue to combat tobacco smuggling effectively.

The hon. Member for Newcastle upon Tyne North mentioned the minimum excise tax. The Government have committed to consult on whether a minimum excise tax for tobacco—which would set a minimum duty rate for a packet of cigarettes—could help to improve public health. This could also be a useful tool to limit the availability of cheap tobacco, further helping to reduce the affordability of smoking.

Let me turn to some of the hon. Lady’s questions. On receipts and HMRC progress, receipts have been on a broadly upward trend in recent years. Receipts are forecast to increase every year up to and including 2018-19. Since the launch of the first anti-fraud strategy in 2000, the illicit market for cigarettes has been reduced from 22% to 9%. The Government continue to monitor tobacco receipts and developments in the tobacco market.

On the National Audit Office and Public Accounts Committee reports, HMRC has already implemented four of the five NAO recommendations and five of the PAC recommendations. We thank them for their work. On working with other agencies, HMRC works with a variety of agencies, including trading standards, to combat illicit trade. Where appropriate, HMRC works with the tobacco industry. HMRC also works collaboratively with public health groups, such as the north of England project, which was acknowledged in the NAO report. Such joint working is clearly important.

On anti-fraud and revenue protection, the Government announced in the Budget that we would consult on three tobacco anti-fraud and revenue protection areas. One relates to anti-forestalling restrictions and the framework convention on tobacco control protocol, which is a World Health Organisation agreement to tackle the illicit tobacco trade. It contains details of a track-and-trace system, but the tobacco products directive proposals go beyond what is required under the trade protocol. We need to see where the directive finally gets to.

I think I have answered the hon. Lady’s questions. The clause implements the tobacco duty rate increases of 2% above inflation and fits into the Government’s wider health agenda of reducing smoking prevalence. I therefore ask her to withdraw her amendment.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the Minister for her response to my queries. We tabled the amendment to send a strong signal that we want to see the issue rising up the Government’s agenda, and we are reassured that she has work ongoing in this area. I therefore beg to ask leave to withdraw the amendment.

Martin Caton (Labour, Gower)

Clauses 72 to 74 have been considered by the Committee of the whole House.

Clause 75 - VED rates for light passenger vehicles, light goods vehicles, motorcycles etc

Martin Caton (Labour, Gower)

With this it will be convenient to discuss the following:

Clauses 76 to 80 stand part.

That schedule 14 be the Fourteenth schedule to the Bill.

Clauses 81 to 85 stand part.

That schedule 15 be the Fifteenth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I have one or two queries to put to the Minister, and I will specify to which clause the queries relate as I go along.

On clauses 75, 76 and 77, according to the Office for Budget Responsibility’s March 2014 economic and fiscal outlook report, vehicle excise duty revenue is predicted to fall from £6.1 billion in 2013-14 to £5.4 billion in 2018-19. The last Labour Government rightly reformed the VED system, such that the rates paid now largely depend on CO2 emissions. However, as greener, more carbon-efficient vehicles become the norm across the UK—which is obviously a welcome development—there are implications for VED as a future source of Government revenue. Will the Minister outline what projections the Treasury has made of the revenue likely to be raised by VED over the next decade and beyond, and by how much she anticipates it will decline? How is that figure kept under review?

The relevant tax information and impact note indicates that clauses 78 and 79 will have a negligible Exchequer impact in 2014-15 and 2015-16, but this will increase to £5 million in 2016-17, £10 million in 2017-18 and £15 million in 2018-19. The cost of a systems change to revise the qualifying cut-off date for the exemption each year will be at least £40,000, which will be met by the Driver and Vehicle Licensing Agency. The note also states that in 2014-15 the measure

“will have an advantageous impact for the owners of around 10,000 classic vehicles…Every year thereafter, the number of classic vehicles will increase as additional cohorts of vehicles are included in the exemption. It is estimated that an additional 10,000 classic vehicles will be affected in each year of the scorecard. Most of these vehicles are assumed to be cars or vans giving annual savings in 2014-15 of £145 or £230, depending on engine size.”

At 30 September 2011, there were 162,734 cars and 152,836 other vehicles exempt from VED on grounds of age. The measure in clause 79 is described by the tax information and impact note as a “rolling exemption” for vehicles built more than 40 years ago, but the explanatory notes suggest that that will be legislated for in every Finance Bill. Will the Minister clarify that point? What administrative issues will owners of classic vehicles face? Will they be granted a lifelong VED exemption on their car’s 40th birthday or will they have to apply for the exemption on an annual basis?

The tax information and impact note states that clause 80 will have a positive Exchequer impact of £25 million a year between 2014-15 and 2017-18, but also that a cost of £2 million is expected for managing and implementing changes to DVLA operational systems. Will the Minister provide more detail on the grants referenced in the tax information and impact note, which will apparently be applicable to those vehicles conforming to the Euro IV, V and VI standards until 31 December 2016? How will the system operate? How will the Government ensure that the system does not place too great an administrative burden on vehicle operators? Finally, will the Minister explain why the reduced VED rates available to less-polluting buses are also being phased out as a result of the introduction of the heavy goods vehicle road user levy? I must declare an interest, in that the excellent Smiles Engineering, which specialises in repowering buses to make them greener and more fuel efficient, is in my constituency.

There is no tax information and impact note for the measures in clause 82 and the explanatory notes provide little detail, so will the Minister explain their impact, who they will affect, the thinking behind them and the cost to the Exchequer?

Clause 83 will make life a little more convenient and very slightly cheaper for millions of motorists in the UK, but will the Minister clarify the costings set out in the tax information and impact note, which suggests a total Exchequer impact of minus £60 million between 2014-15 and 2018-19? I appreciate that the DVLA estimates that it will cost £8 million to set up the new scheme—the scheme for payment of vehicle excise duty by direct debit, for those who are still following me—but surely it will result in a significant efficiency saving going forward. How will the DVLA ensure that everyone is aware that the scheme is available? What support will be provided to more vulnerable taxpayers, many of whom still instinctively distrust the direct debit and banking system in general?

We do not have any queries relating to clause 84, which deals with the definition of “revenue weight”. Clause 85 deals with vehicle excise and registration. Coming after numerous fairly technical clauses in this part, it introduces a change that will affect the majority of people in the UK—including, I suspect, Committee members in this room, although not my hon. Friend the Member for Gateshead. As announced in the autumn statement 2013, the clause signifies the end of the beloved tax disc, which has served as proof of payment since 1921, following the Roads Act 1920 and the Finance Act 1920. At that time, what we now know as vehicle excise duty was referred to as the road fund licence.

However, long gone are the days when it was part of a police officer’s duty to inspect cars for valid tax discs, particularly as the police and the DVLA now rely largely on the DVLA’s electronic vehicle register and tools such as automatic number plate recognition cameras to support vehicle excise duty compliance. As of 1 October 2014, no longer will the Del Boys of this world be able to put a “Tax disc in the post” sign on their windscreen. We continue to move away from paper-based records and towards electronic registration in every aspect of our daily lives.

The requirement for paper tax discs to be displayed in vehicles will be removed through amendments to the Road Vehicles (Registration and Licensing) Regulations 2002. When does the Minister expect the revised regulations to come before the House? The tax information and impact note suggests that the abolition of the tax disc will benefit owners of vehicles used for business purposes by about £7 million a year on aggregate. How has that figure been reached?

One key way in which people have renewed their paper tax disc has been over the counter at the post office. The tax information and impact note suggests that the measure will benefit the post office network through savings to the costs of storing, securing and transporting paper-based vehicle licences. However, there are also strong concerns that the move will have negative repercussions for our post offices. Can the Minister outline the Government’s assessment of the potential negative impacts of the change on the network, and what steps are being taken to mitigate them?

The tax information and impact note also suggests that the change will have a negligible or nil Exchequer impact between 2014-15 and 2018-19, but that it will have a fixed cost to the DVLA of between £3 million and £6 million for the ceasing of the tax disc and of £10 million for the amendment of the refund process—for example, when one’s car is stolen or sold. The ongoing savings to the DVLA are expected to be about £7 million a year, because it will no longer produce, issue and post the tax disc.

Can the Minister say a little more about the impact of this measure? What impact is it expected to have on reducing vehicle excise duty evasion? The latest VED evasion figures, published by the Department for Transport rather than HMRC, suggest that VED evasion decreased slightly between 2011 and 2013 and that the level has remained relatively low, with some minor fluctuations, since 2008. Although it is just 0.6% of the amount due, that still equated to about £35 million in 2013-14. The Minister no doubt expects that figure to decrease even further as a result of abolishing the paper tax disc.

Finally, on clause 87, the Department for Transport and the Vehicle and Operator Services Agency require information held by HMRC about HGVs in order to implement the HGV road users levy. The information required is held on the freight targeting system. HMRC agreed to provide the information to DFT and VOSA by creating a legal gateway in a statutory instrument, utilising powers contained in the HGV Road User Levy Act 2013. Because of an error, however, the 2013 Act did not allow for the creation of a criminal offence of wrongful disclosure of identifying information in relation to the HGV road user levy, so clause 87 rectifies the situation. We welcome the fact that that has been recognised and dealt with as the levy is introduced. The explanatory notes briefly mention how taxpayer confidentiality will be safeguarded in the light of the new information-sharing gateway. To reassure Committee members and members of the public who take an interest in the matter, will the Minister say something about how that will be assured?

Nicky Morgan (Conservative, Loughborough)

I thank the hon. Lady for her questions and points. I will try to deal with them all, but I am sure that she will let me know if anything is outstanding at the end. Clauses 75 to 85 introduce changes to vehicle excise duty for cars, vans, motorcycles, heavy goods vehicles and classic vehicles. These clauses also introduce significant changes to the way in which VED is administered by abolishing the paper tax disc and introducing a direct debit payment method for motorists to pay their tax.

Clause 75 makes changes to VED rates for cars, vans and motorcycles, with effect from 1 April 2014. The Government announced at Budget 2014 that duty rates for cars and motorcycles, and the main rate for vans, would increase in line with inflation from 1 April. As a result, duty rates for those vehicles have remained unchanged in real terms, helping to support families and businesses with their costs. Owners of cars that were first registered on or after 1 March 2001 pay duty based on the carbon dioxide emissions of those cars. About 95% of people with such cars will pay no more than £5 extra in 2014-15. Owners of the most polluting cars will pay, at most, £10 extra. Rates remain unchanged for the cleanest cars. Cars registered before 1 March 2001 will incur only a £5 increase in duty, as will vans. Motorcyclists will see an increase of no more than £2.

Let me turn to clauses 78 and 79. The Government believe that classic vehicles are an important part of the nation’s heritage, so the duty exemption is designed to support the maintenance and use of classic vehicles. At Budget 2013, we announced that we would extend the exemption cut-off date by one year to vehicles built before 1 January 1974, and at Budget 2014 the reintroduction of a rolling exemption on a 40-year basis was announced. Clause 78 extends the scope of the exemption to vehicles manufactured in 1973 and comes into effect from 1 April this year. Clause 79 extends the scope of the exemption by a further year to vehicles manufactured in 1974 and comes into effect on 1 April 2015. The Government are committed to legislating each year, as the hon. Member for Newcastle upon Tyne North has said, to extend the cut-off date of the exemption by one year to ensure the rolling 40-year exemption. In 2014-15, the exemption is worth £145 or £230, depending on the engine size of the vehicle. The Government estimate that some 10,000 owners of classic vehicles will benefit each year.

Clause 83 relates to direct debits. Currently, duty can be paid by cash, cheque and credit or debit cards. At Budget 2012 we announced that we would aim to develop a direct debit system for VED payments to allow families and businesses to spread their tax payments. The DVLA conducted a public survey in October 2013, in which approximately 70% of those surveyed expressed an interest in paying their duty by direct debit. At autumn statement 2013, the Government announced that they would introduce such a system from October this year. Clause 83 will allow the DVLA to collect duty via direct debit in a one-off annual payment, two six-monthly payments or 12 monthly payments if motorists wish to pay in that way. Motorists who buy a six-month duty licence currently pay a 10% surcharge, but in the direct debit scheme the surcharge will be halved to 5% when tax is paid by monthly or six-monthly direct debit.

Clause 85 deals with the abolition of the tax disc. Clause 85 and schedule 15 are the first stage in the legislative process that will remove the requirement for vehicle licences, trade licences and nil licences—as the hon. Member for Newcastle upon Tyne North put it, the “beloved tax disc”—to be displayed in vehicles from 1 October this year. Approximately 45 million tax discs are issued by the DVLA and the Post Office every year. Historically, they have provided a visual aid that demonstrates that vehicle excise duty has been paid, but they have become redundant over time. The DVLA and the police now rely on the DVLA’s electronic vehicle register and use tools such as automatic number plate recognition cameras to ensure that duty has been paid. Those enforcement tools have helped to improve compliance, with non-payment of duty running at an historic low of 0.6% in 2013.

The changes made by clause 85 and schedule 15 mean that from 1 October this year motorists will no longer receive a paper tax disc to fix to, and exhibit in, their vehicle as proof that duty has been paid on it. The change could provide businesses with administrative cost savings of about £7 million per year. In addition, it will provide the taxpayer with annual cost savings of about £7 million, as the DVLA will no longer have to produce, issue and post tax discs to motorists. The abolition of the tax disc is part of the Government’s wider digital strategy to move Government services to digital channels. The clause and the schedule pave the way for changes to be presented to Parliament later this year to remove the requirement to display a tax disc. The hon. Lady asked about the regulations, which we intend to lay in July. They are to be introduced under the negative parliamentary procedure and will come into force on 1 October this year.

Let me turn to the HGV duty rates restructure. Rates for buses and heavy goods vehicles under 12 tonnes continue to be frozen. UK and foreign goods vehicles of 12 tonnes or over are subject to the new HGV road user levy. Our aim is to achieve as complete a levy offset for UK hauliers as is practically possible. Clauses 76 and 77 introduce rate reductions to offset the levy, with new rates categories to align the UK tax system with the lowest tax rates permitted by pan-European agreement.

Clause 80 and the associated schedule 14 withdraw historic reduced pollution discounts to build room for the levy-offsetting rate reductions. The discounts are replaced by already legislated grant payments administered by the Department for Transport. For buses and goods vehicles outside the levy, reduced pollution discounts will be tapered off through the nine months from 1 April 2016 to 1 January 2017. That will remove the anomaly of, for example, a 1999 vehicle being awarded a discount, while an even lower-pollution 2007 vehicle is not. The proposal was shared with stakeholders during the Bill consultation, and I am glad to report that no concerns were raised.

Clause 81 ensures that UK hauliers can always pay the duty and levy together in a single transaction, including for combined transport vehicles that deliver goods for onward rail transport to Europe. We must keep the bi-annual levy equivalent to accumulative monthly payments made by foreign hauliers, so we are presenting a practical means of further delivering offsets for UK hauliers. Clause 82 therefore reduces bi-annual duty to counter the 20% extra in two bi-annual levy payments compared with an annual payment. Clause 84 further aligns the UK tax system with the lowest tax rates permitted by pan-European agreement by adopting the agreement’s weight thresholds. The change is carefully framed to avoid any real-world impact on UK hauliers’ day-to-day operations. It is another means of delivering as complete a levy offset for UK hauliers as is practically possible.

Let me turn to some of the hon. Lady’s questions. She asked about the changes to duty resulting from the previous Government’s change to charging less-polluting vehicles a lower rate of duty. Of course, in the end, that will bring in less money because there are more low-pollution vehicles. The duty revenue raised is projected to fall by £1.5 billion in real terms by the end of the decade. As she will know, we keep all taxes under review. It is good that we have more lower-polluting vehicles on the roads, but that is clearly having an impact on the duty that will be taken, and that is something the Treasury, under any Government, would have to keep under review.

On historic vehicles, owners will need to apply each year. We will keep the issue under review, but the idea is obviously to keep administrative requirements as free from burdens as possible and to make things as easy as possible. The rolling exemption is provided for in each year’s Finance Bill to provide legislative flexibility, just in case any further changes need to be made.

The DVLA is developing a communication plan to ensure that the public are aware of the availability of the direct debit scheme. Stakeholders are being used to help put the message out, and I am sure Members of Parliament could also do that to make sure our constituents are aware of the changes when they next pay their duty.

I have already mentioned that evasion fell to the historic low of 0.6% in 2013. There is a comprehensive package of measures to tackle unlicensed vehicles, ranging from reminder letters, fixed penalties, court prosecutions and, as a last resort, wheel-clamping and removal of the vehicle. I have already mentioned channels such as automatic number plate recognition that allow the DVLA to track those who have not paid duty.

I have mentioned the regulations coming into force and the £7 million savings. The administrative savings will include postage in relation to paperwork and new tax discs. The £7 million was arrived at after stakeholder engagement with the British Vehicle Rental and Leasing Association. The sum represents businesses no longer needing to re-post tax discs and the reduced cost of returning the disc for a refund.

The hon. Member for Newcastle upon Tyne North asked, with reference to clauses 76 and 77, how the grants for reduced pollution trucks would operate. HGVs over 12 tonnes with a recent reduced pollution certificate will receive a grant from the Department for Transport that equals the previous duty reduction for such vehicles. The grant will be made as part of the truck operator’s vehicle excise payment. The amount of vehicle excise due will be offset against the amount of grant paid to the truck operator, so that in effect the grant is issued with no burden to the operator.

Clauses 75 to 85 support motorists with the cost of living, while ensuring that they continue to make a fair contribution to the reduction of the deficit. They provide tax administration savings to businesses and make it administratively more convenient for millions of motorists to pay their duty and license their vehicle. The clauses provide fairness by delivering offsetting vehicle excise duty rate reductions for UK hauliers with the 1 April introduction of the HGV road user levy.

Clause 88 - Aggregates levy: removal of certain exemptions

Martin Caton (Labour, Gower)

With this, it will be convenient to take clause 89 stand part.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 88 suspends those exemptions, including exclusions and reliefs, from the aggregates levy that are subject to a state aid investigation by the European Commission. The exemptions are suspended as of 1 April 2014.

Clause 89, in anticipation of a positive outcome to the European Commission investigation, provides for secondary legislation to reinstate the exemptions, and even to allow for backdated repayments from HMRC to those who have paid additional levies.

The aggregates levy is a tax on the “commercial exploitation” in the UK of rock, sand and gravel—sand, gravel and rock that is dug from UK soil or dredged from the sea in UK waters. Spoil, waste, offcuts and by-products of certain processes are also “aggregate” and subject to the levy. There is one basic rate of levy—£2 per tonne— though lesser amounts incur a smaller levy; so half a tonne of aggregate, for example, incurs a £1 levy. Producers of aggregates in the UK must therefore register and report the quantity of material that they produce and sell to the Government.

The Finance Act 2001, which the previous Labour Government introduced, provided for certain exemptions from the levy. The tax information and impact note informs us that the European Commission at the time decided not to raise any objections to the aggregates levy and, specifically, the exemptions provided for. However, clause 89 is before us today because that decision was annulled by the European General Court on 7 March 2012, with the Commission subsequently carrying out a preliminary assessment of the levy with the aim of determining whether any objections on the grounds that certain exemptions constituted state aid should be raised.

In a written statement on 13 September last year the then Economic Secretary made it clear that the Government disagreed with the view that these exemptions give rise to state aid, and stated:

“The Government are therefore only taking steps to suspend the application of those elements of the levy that now form the subject matter of the formal investigation because they are obliged to do so under article 108(3) of the treaty on the functioning of the European Union.”—[Official Report, 13 September 2013; Vol. 567, c. 65WS.]

HMRC published an interim guidance note in March which aims to clarify what those changes mean for affected businesses. It also sets out exactly what elements, as of 1 April 2014, are now taxable under the aggregates levy. The tax information and impact note suggests these changes will yield an additional £20 million in Exchequer revenue in 2014-15, with absolutely no Exchequer impact thereafter. The note also suggests that these measures will affect around 200 businesses and hints at potential additional financial costs for affected businesses.

Could the Minister set out the estimated financial impact of these changes on the approximately 200 affected businesses? As for potential significant financial burdens to certain businesses, is the Minister aware of any significant instances where this may be the case, and can she elaborate on what kind of significant burden this will be for those businesses? Turning to the European Commission’s investigation, could the Minister update the Committee on what progress has been made so far? What information have the Government provided to the Commission and has the Commission, at least so far, been satisfied with the information provided? Finally, in relation to the possible outcomes of this investigation, when can we expect a final decision from the Commission? Are we looking at 12 months or potentially longer than that?

Following on from the suspension of levy exemptions, clause 89 provides for secondary legislation to be introduced to enable the Treasury to restore those exemptions, exclusions and reliefs. Critically, it can restore them retrospectively and before the secondary legislation is made. In other words, this will mean that tax paid as a result of the suspension of an exemption from 1 April 2014 until whenever these exemptions are restored—I should say, if they are restored—can be repaid to the person or business who accounted for it. These provisions will be made only following the conclusion of the Commission’s investigation, should the terms of the Commission’s final decision allow such backdated payments and, indeed, if the Commission is satisfied with the exemptions in the first place.

The explanatory notes point out that in order for such payment to happen, HMRC would need to be satisfied that the taxpayer would not be unjustly enriched as a result of receiving the repayment. It suggests that businesses may therefore think about keeping records to demonstrate that they would not gain financially from this repayment. The explanatory notes suggest this could be done, for example, by including a commitment in contracts to repay any amounts charged to their customers to cover all or part of the cost of the levy in the event that the taxpayer is repaid the tax. There does not appear to be a tax information and impact note for the measures contained in the clause, although they are referenced in the tax information and impact note for clause 88. That note, however, suggests a £20 million yield to the Government, yet the provisions in the clause suggest that the Government intend to repay any levy payments made as a result of aggregates losing their exemption. So one would expect a neutral outcome for Treasury on first glance.

It would be helpful if the Minister could provide a bit more clarity on the Government’s intentions on backdating levy repayments. Do they intend to repay businesses in full for any additional tax paid as a result of the suspension of certain exemptions? In which case, would the measures contained in clauses 88 and 89 not be broadly revenue neutral, perhaps having a negligible impact, at most, if the additional revenue yielded now is later going to be paid back?

Finally, the language surrounding these provisions in both the explanatory notes and tax information impact note seems very optimistic and somewhat presumptuous in anticipating the Commission in allowing the Government to once again restore these exemptions. In line with my previous queries, will the Minister explain this optimism that the Government will be able to restore all the suspended exemptions provided for in clause 88? Indeed, have they already had an indication from the Commission that this is the likely outcome?

Nicky Morgan (Conservative, Loughborough)

Clause 88, as we have heard, suspends certain exemptions, exclusions and reliefs from the aggregates levy that are the subject of a European Commission investigation. Clause 89 gives the Treasury the power to use a Treasury order to reinstate those same exemptions, exclusions and reliefs from the aggregates levy, should the conclusion of the European Commission state aid investigation allow.

I will give some background to the investigation before coming on to the detail of the clauses. On 7 March 2012 the European General Court annulled a 2002 decision by the Commission not to raise objections to the aggregates levy. Because of that judgment, the Commission carried out a preliminary assessment of the levy to decide whether to raise objections on the grounds that it potentially gave rise to state aid. On 31 July 2013 the Commission notified its decision to open a formal state aid investigation to determine whether some of the exemptions, exclusions and reliefs falling within the provisions of the clauses amount to state aid and, if so, whether they are allowable state aid.

The changes introduced by clause 88 make 24 different kinds of mineral—together with spoil, waste and other by-products from their extraction—taxable. In addition, material that is more than half, but not exclusively, the spoil, waste or other by-product of an industrial combustion process or the smelting or refining of metal is also made taxable. To reflect the Commission’s doubts about whether slate, shale, coal, lignite, clay and certain specified industrial minerals such as fluorspar and potash are ever used as aggregates, these materials become chargeable with levy only when they are commercially exploited for construction purposes. The use of clay or shale in the manufacture of ceramic construction products such as bricks and roof tiles, and the use of gypsum or anhydrite in the production of plaster, plasterboard or related products have never been regarded as aggregate uses and so, to ensure these uses continue not to be taxed, they become exempt processes. All these changes take effect from 1 April 2014. Clause 89 enables the Government to reinstate any or all of the suspended elements of the levy if, in concluding its investigation, the Commission decides that these elements are not state aid, or are allowable state aid.

On the expectation that the Commission will conclude its investigation during 2014-15 and find that none of the exemptions, exclusions or reliefs amount to state aid, the changes are forecast to result in a revenue yield of £20 million during this year only. The hon. Member for Newcastle upon Tyne North asked how the £20 million was calculated. A variety of data sources were used to establish the tax base for the measure, including mineral product association data derived from WRAP research carried out for the Department for Communities and Local Government, the Department for Business, Innovation and Skills monthly bulletin and the annual minerals raised inquiry, also known as Business Monitor PA1007, published by the Office for National Statistics. Those data were used to estimate that around 7 million tonnes of aggregate would be brought into taxation through the suspension of the exemptions. The static costing was calculated by multiplying the tax base by the change from zero to £2 levy payable per tonne. An adjustment was also made to account for material expected to be used by the Environment Agency following the flooding in early 2014. The overall behavioural effect from suspending the exemptions was expected to have a negligible effect on the yield, and the yield was assumed to be zero in future years as we expect to reintroduce the exemptions in 2015-16. The Commission has indicated that it aims to conclude the investigation this autumn. In relation to the optimism, the Government have always maintained that none of the exemptions, exclusions and reliefs being investigated are state aid. We are very clear about that. My officials have been providing evidence to the Commission to support that view as part of a formal investigation process, and I sincerely hope the Commission will agree with our position.

The changes are expected to directly affect around 200 businesses, which will incur some additional costs associated with registering, record-keeping and accounting for the tax. How did we arrive at 200 businesses? The British Geological Survey’s directory of mines and quarries provides details of mine and quarry operators, their sites and the minerals they extract. It was possible to estimate the number of businesses affected by the suspension from the details in the directory of operators dealing in the materials affected.

Those businesses may incur a significant financial burden if they are unable to pass on the cost of the levy fully to their customers. Businesses that commercially exploit slate for use as aggregate or commercially exploit the waste arising from ball clay and china clay are likely to be most affected by the suspensions. However, aggregate sales are ancillary for such businesses, so the burden should not be excessive.

Clause 89 provides for the suspended elements of the levy to be restored retrospectively if the Commission decision allows. HMRC will therefore be able to repay the tax paid as a result of the suspension, potentially putting effective businesses back in the position that they would have been in had the suspension not taken place. Using a Treasury order for this purpose will ensure that there is no delay in giving effect to the reinstatement, should the timing of the Commission decision not fit with the timetable for a future Finance Bill. As we have heard, the tax information and impact note estimates the cost at £20 million. We will need to wait for the Commission’s decision before we can look at the impacts or exactly how we will make repayments, but the idea will be to get the money back to businesses as quickly as possible.

My officials are co-operating fully with the Commission to expedite the conclusion of the investigation. While it continues, the Government have suspended those elements subject to the investigation only—I emphasise that—because they are obliged to do so under European law and only to the extent that the Commission has expressed doubts about them. Although it is impossible to say whether any reinstatement of the exemptions will take place, it is important to act now to ensure that tax that is collected only because the Commission investigation obliges us to collect it can be repaid without delay should the conclusion of the investigation allow.

Clause 90 - Climate change levy: main rates for 2015-16

Martin Caton (Labour, Gower)

With this it will be convenient to consider the following:

Clause 91 stand part.

Amendment 25, in clause 92, page 84, line 16, at end insert—

‘(3) The section shall not come into force except as specified in subsection (2) below.

(1) The Chancellor of the Exchequer shall bring the section into force by order within six months of the passing of this Act.

(2) A statutory instrument containing an order under subsection (3) shall be accompanied by a report which details—

(a) the impact of the provisions in the section on consumers and on fuel poverty;

(b) the impact of the provisions in the section on energy-intensive industries and on employment in those industries;

(c) the level of carbon leakage in the energy-intensive industry as a result of the provisions in this section;

(d) the effect of the provisions in the section on investment in new renewable power generation and on investment in new nuclear power generation;

(e) any effective subsidy provided to, or additional profits accruing to, operators of existing and new nuclear power stations as a result of the provisions in the section;

(f) what additional package of measures will be enacted to mitigate the impact of the section on energy-intensive industries;

(g) the impact on business investment of—

(i) changes to Schedule 6 to the Finance Act 2000 made by Finance Act 2011;

(ii) changes to Schedule 6 to the Finance Act 2000 made by this Act.”

Clauses 92 and 93 stand part.

That schedule 16 be the Sixteenth schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 90 is the first of four clauses making provision for the climate change levy. Introduced in 2001, the climate change levy is an environmental tax on energy supplies to industry, commerce, agriculture and public services; it does not apply to domestic energy supplies, businesses that use only a small amount of energy or charities engaged in non-commercial activities. It is aimed at promoting energy efficiency and the use of renewable energy so as to meet the UK’s international obligations under the Kyoto protocol and our domestic targets for cutting greenhouse gas emissions.

The climate change levy is made up of two components: the main rates and the carbon price support rates, otherwise known as the carbon price floor. Clause 90 deals with the main rates of CCL, while clauses 91 and 92 deal with the carbon price floor. I have much that I want to say about the climate change levy, specifically in relation to the carbon price floor; I will therefore reserve the majority of my comments for clause 92 and our amendment 25.

All rates of CCL are charged at a specific rate per unit of energy. For the main rate of CCL there are separate rates for electricity, natural gas, liquefied petroleum gas and solid fuels. As the explanatory notes point out, since 2007 it has been standard practice for those rates to increase in line with inflation to ensure that the levy maintains its environmental effect. Successive Finance Acts have therefore legislated for the following year’s inflationary increases; clause 91 continues in that vein by uprating the main rates of CCL in line with the retail prices index.

Clause 91 is the first of the clauses that deal with the carbon price support rates of the climate change levy, which is the mechanism that underpins the carbon price floor. As I have mentioned previously, there is quite a lot to discuss on the carbon price support rates. Clause 91 makes provisions for the third of the bands, coal and other taxable solid fuels, reducing the rates previously set for those fuels for the years 2014-15 and 2015-16. The CPS rates of CPL are legislated for two years in advance, based on a rate per tonne of carbon set that year by the Government. The explanatory note suggests that the purpose of the measure is to correct rates for coal and other solid fuels in the light of incorrect data, the rates having been set too high for 2014-15 and 2015-16. I should be grateful if the Minister elaborated further on that.

Where did the original data that are now deemed inaccurate come from? Have the updated figures come from the same data source? If so, can the Minister reassure Committee members that they are now accurate? Equally, if the CPF rates for the climate change levy for coal and other solid fuels were set too high in 2013-14, presumably electricity generators using such fuels paid a disproportionate amount of tax on their carbon emissions, compared with other types of electricity generators. Can the Minister confirm whether that is so? If so, will she provide further details about how much more, on average, such electricity generators paid in rates for CCL?

Finally, the tax information and impact note accompanying the measures, along with the policy costings document published alongside Budget 2014, referred to the Exchequer impact of all changes and reforms to the carbon price floor—those predominantly provided for in clause 92, which I will come to shortly. It would be helpful if the Minister set out the Exchequer impact, if any, of the measures in this clause. Considering that the carbon price support rates for coal and other solid fossil fuels have been reduced, presumably that will have a negative impact on Exchequer revenue. I should be grateful if the Minister clarified those points, which are not clear from the information that has been provided.

Clause 92 makes provision to reform the coalition Government’s carbon price floor. Before I come to our amendment 25 to clause 92, let me briefly outline the provisions in the clause and some background to the carbon price floor. The carbon price floor combines two different rates or systems to reach the price per tonne of carbon: the EU emissions trading system and the headline carbon price support rate, a UK-only rate that we covered in the debate on the previous clause. The CPF rate per tonne of carbon provides a top-up to the EU ETS price, so that the cost per tonne of emitted carbon in the UK from the generation of electricity is no less than the rate specified by the carbon price floor.

The coalition Government introduced the carbon price floor, along with the accompanying CPF rates to top-up the cost of carbon, in April 2013. The overall CPF rate was set at £4.94 per tonne of carbon in its first year. This year it is set at £9.55 per tonne of carbon, rising to £18.08 per tonne of carbon for 2015-16.

Nicholas Dakin (Labour, Scunthorpe)

Does my hon. Friend share my surprise that the Government did not do their homework at that time to check how to ensure mitigation for high-energy users through the EU before rushing in with these carbon floor taxes?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank my hon. Friend for his intervention. He anticipates many points that I will make. He and I were not the only ones who were surprised; a wide variety of interested parties, including Ministers, were surprised, feeling that the tax was ill thought through. The explanatory notes on the clause set out the Government’s reasoning for the cap:

“Since the CPF was introduced the EU ETS carbon prices have fallen, meaning the gap between UK energy prices and energy prices abroad has grown and would continue to do so if the original CPF trajectory was maintained. The introduction of a cap on the UK-only element of the CPF is intended to limit the disparity between UK and non-UK energy costs.”

The Opposition made an observation on that when the carbon price floor was debated in the Finance Bill Committee in 2011, and that observation remains a key focus of our amendment 25. My hon. Friend the Member for Bristol East (Kerry McCarthy), in her role as shadow Economic Secretary at the time, made a number of observations in that year’s Finance Bill Committee, most of which, unfortunately—I genuinely mean that—appear to have finally been realised by this Government.

The Opposition moved an amendment to the Finance Bill in 2011 that sought a Government review of the impact of the carbon price floor on, in particular: energy bills and fuel poverty; manufacturing, heavy industry and employment in those industries; business investment; and investment in renewables. At the time, my hon. Friend pointed out that the carbon price floor would not do what Ministers promised, that manufacturing would be hit as a result and that we might not even reduce carbon emissions by a single tonne. None the less, the Government voted down the amendment, dismissed the Opposition’s concerns and labelled our amendment as unnecessary; yet three years later the Government are now having to U-turn on their original policy after acknowledging its damaging impact on Britain’s businesses and the worrying prospects for the future. Amendment 25 calls on the Government to conduct the review that they previously dismissed as unnecessary. Indeed, it builds on the amendment we moved in last year’s Finance Bill Committee, which called on the Government to review the impact of the carbon price floor on their emissions reduction commitments.

In response to my hon. Friend the Member for Scunthorpe, I have mentioned that it was not only Opposition Front Benchers who were raising those concerns. Our voice was one in a growing chorus calling on the Government at the very least to take stock of the carbon price floor and its impact on businesses, consumers and the green industry. Carbon market specialists have held the CPF up as one of the best examples of carbon leakage. Experts from the Institute for Public Policy Research labelled it

“not a green tax, it’s just a tax on business and households.”

Even Greenpeace spokespeople lamented the carbon price floor for giving green taxes “a bad name.”

The Chancellor and his colleagues may also be aware that criticisms of the carbon price floor have been heard much closer to home. For example, The Daily Telegraph reported that the right hon. Member for Sevenoaks (Michael Fallon), before becoming Minister of State, Department of Energy and Climate Change, thought the policy was ineffective, labelling it

“a fairly absurd waste of your money”.

He made those comments to a Telegraph reporter when he mistakenly thought that the policy had been inherited from the previous Labour Government. More recently, the Secretary of State for Business, Innovation and Skills has expressed his doubt about the carbon price floor. According to a Reuters report, he told an industry event in January hosted by Tata Steel:

“Energy-intensive industry has got special problems arising from British energy costs. The carbon price floor is pricing in a disadvantage to UK producers.”

Perhaps a result of those concerns is that the Government have finally chosen to act and make some welcome changes in this year’s Budget.

One of the Opposition’s key concerns about the carbon price floor is how it will affect, and has affected, British industry. The Chancellor told the House in his 2011 autumn statement:

“We are not going to save the planet by shutting down our steel mills, aluminium smelters and paper manufacturers. All we will be doing is exporting valuable jobs from this country”.—[Official Report, 29 November 2011; Vol. 536, c. 807.]

We wholeheartedly share those concerns. Indeed, the Select Committee on Energy and Climate Change pointed out that that is exactly what the carbon price floor would do.

Charlie Elphicke (Conservative, Dover)

Does that not make the case for carbon-free nuclear power ever stronger? Why did Labour not build any of those power stations?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It is outside the scope of this clause to get into a much wider debate about the energy mix we need in this country, although we have had that debate in relation to previous clauses. It is important not to brush over the key issues in relation to carbon price support. Indeed, our amendment calls on the Government to put proper thought into how they approach the matter. We called for such thought in 2011, 2012 and 2013, and here we are again, calling for proper consideration to be given to our industry. I appreciate that the hon. Gentleman has an interest in these issues, but I do not think they are particularly relevant to the clause.

In the 2011 autumn statement the Chancellor promised a £250 million compensation package for some energy-intensive industries, yet Ministers have recently confirmed to me in a written answer that so far no businesses have been compensated for the indirect costs of the carbon price floor, due to the scheme still requiring state aid clearance. I see that we do not have many swivel-eyed Members on the Government Benches today—most seem to be yawning, rather than eye-swivelling.

Chris Heaton-Harris (Conservative, Daventry)

I’m here!

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Oh, the hon. Gentleman is here.

Nicholas Dakin (Labour, Scunthorpe)

Not only have energy-intensive industries not received a penny of compensation for the carbon floor price; the Government cannot guarantee—although they are trying their best—that any compensation or mitigation that is forthcoming will be backdated to April 2013, when the costs began for our local businesses, which are competing in a very competitive market.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Indeed. Given the importance of the issue to so many businesses up and down the country, the responses that we are getting are quite disturbing. The Minister of State, Department of Energy and Climate Change, the right hon. Member for Sevenoaks, has repeatedly stated that he is “hopeful” that state aid clearance for the carbon price floor compensation scheme will be received “soon”. Indeed, he has been “hopeful” since as long ago as February, so can this Minister now confirm with greater certainty, which so many businesses desperately need, when exactly energy-intensive industries can expect to see their long-awaited compensation for the carbon price floor?

Also, the Minister of State has indicated in answer to parliamentary questions that even when the UK does receive state aid clearance—this point was raised by my hon. Friend the Member for Scunthorpe—that will not include clearance for backdated payments, so I would be grateful if this Minister confirmed whether the UK Government will continue to seek approval for that from the European Commission, and provide reassurance to affected businesses, which have been promised support but so far have not received any.

The Opposition have made it clear since the carbon price floor’s inception that any action to tackle carbon emissions must be taken at European level, not through the UK acting alone. Indeed, that is also the view of the Select Committee on Energy and Climate Change, which in a 2012 report says that only an EU-wide price for carbon emissions can be the way forward, pointing out that the UK acting on its own will have no impact on carbon emissions. This year’s Budget document suggests that the Government now agree with that view, emphasising the need to reform and strengthen the EU ETS.

I put similar questions to the then Economic Secretary to the Treasury in last year’s Finance Bill Committee, but I think that it is worth putting them again, as there may have been some development in the Government’s thinking. In the light of the view set out in the Budget document, can the Minister outline what steps the Government are taking to secure the necessary reforms of the EU ETS? What conversations are she or other Ministers having with European Energy Ministers to strengthen the EU ETS? Can the Minister enlighten Committee members on how exactly the UK Government feel that the EU ETS can be reformed and strengthened to enable it effectively to reduce carbon emissions at European level, as opposed to action taken by the UK only? Does the Minister have any estimates of what the price of carbon under the EU ETS might look like around 2020? In other words, does she predict that the price of carbon will increase significantly under the EU ETS up to 2020, or does the UK Government anticipate that the EU ETS price will remain broadly where it is at present? Presumably those kinds of assessment are being undertaken by the Government and, obviously, long-term certainty for businesses affected by these prices is crucial for confidence to invest.

The Opposition’s amendment 25 also calls on the Government to review the impact that the carbon price floor has had on energy bills and, by extension, consumers and the number of households pushed into fuel poverty as a result of the measures. That was another concern that was raised by the Opposition back in 2011 and dismissed at the time. The then shadow Economic Secretary highlighted the Government’s own estimates, which suggested that between 30,000 and 60,000 more households would fall into fuel poverty in 2013, rising to between 50,000 and 90,000 more households by 2020, as a direct result of the carbon price floor.

Official fuel poverty figures are only as recent as 2011. Under the original fuel poverty definition, 4.5 million households were in fuel poverty in that year. However, the latest report from the Energy Bill Revolution estimates that that figure rose to 5.8 million in 2013 and that currently 6.6 million households are in fuel poverty. That is almost 2 million more households in fuel poverty in three years—a rise of 49%. Most worrying of all, 1.4 million of those households are families with children.

Clearly, a range of factors lie behind the rise, not least a £300 increase in energy bills for households since 2010, but it is critical for the Government to understand what impact their own policies, such as the carbon price floor, have had on energy prices and fuel poverty. Will the Minister confirm to the Committee what estimates the Government have made of the number of households pushed into fuel poverty as a result of the carbon price floor?

I recently visited an energy-intensive company in the north-east, on Teesside, where one of the largest integrated process industry clusters in Europe is located. I came away from that visit with some clear messages, reflective of the wider energy-intensive industries in the UK. First, the coalition Government’s lack of clarity and long-term certainty on energy policy has been particularly damaging for business investment. Secondly, certain industries, such as those on Teesside, by the very nature of their work and their industry will remain heavily reliant on less clean fuels. Such industries need heat, often on substantial scales, but those issues seem to have been overlooked by the coalition Government when formulating policies such as the carbon price floor.

It is welcome that the Government recognised in the recent Budget that the utilisation of combined heat and power systems—now used by many in the energy-intensive industries—is effective in terms of cost and carbon reduction. The Budget announcement that fuels used to generate good-quality electricity by CHP plants for on-site purposes will be exempt from the carbon price floor is welcome, although the exemption will not be acted upon until April 2015.

None the less, Opposition amendment 25 calls on the Government to conduct a thorough review of the impact of their carbon price floor across a range of different areas. The Opposition expressed a number of concerns in 2011, with the first legislation, but the Government dismissed them at the time. Now, unfortunately, they appear to have been realised. I urge all Committee members, who I know take the issue seriously and care a lot about the affected businesses, to support our amendment. The exercise that we are calling for would give better understanding of what changes can now be made to put consumers, businesses and Britain in a much stronger position on energy policy.

The finalised measures in clause 93 and the schedule to it, following a consultation last year and a second one as part of the published draft Finance Bill, and according to my understanding of the tax information and impact note, differ from the earlier proposals in two ways. First, there is guidance on the impact of the new exemptions on those businesses or industries that are signed up either to the climate change agreement or to the carbon reduction commitment schemes, for example, but what happens to businesses that are no longer required to sign up to such schemes as a result of becoming wholly or partly exempt from the climate change levy?

Secondly, there are minor changes to the scope of the metallurgical and mineralogical exemptions, most notably the addition of sheet metal pressing as an eligible metallurgical process. The measures, however, appear to be the result of concerns that the climate change levy, as it previously applied to those sectors—both energy-intensive industries—significantly harmed their international competitiveness. Indeed, the tax information and impact note appears to bear that out. When the exemptions were first announced in Budget 2013, British Glass welcomed the changes, pointing out the competitive disadvantage to the granite, cement and glass sectors as a result of the climate change levy.

We have already discussed at great length under clause 92 the impacts of the climate change levy on British industry, and I do not seek to replay them in relation to clause 93. It would be helpful, however, for the Minister to respond to a few outstanding queries. Considering that the tax information and impact note suggests that the measures will bring UK tax treatment for metallurgical and mineralogical industrial processes in line with those throughout Europe, will the Minister outline how many other EU countries already have such measures in place? Will the Minister set out how long such exemptions have been in place in other parts of Europe, and why? If the EU legislation allowed for such exemptions, why are the Government only now implementing them?

Has the Minister made any assessment of the impact of the competition distortions, as outlined in the tax information and impact note, on British businesses involved in metallurgical and mineralogical processes? It is, of course, welcome that the UK Government are now providing for the exemptions. The tax information and impact note merely states that these measures will

“improve the international competitiveness of firms in the metallurgical and mineralogical sectors”.

However, I am interested to hear what estimate, if any, the Government have made of the average financial benefit to affected industries as a result of these exemptions. Presumably, that work has been done and it would be useful for the Committee to hear the Government’s thinking.

Nicholas Dakin (Labour, Scunthorpe)

I have to speak on this issue because of the direct impact of the carbon floor price on steel, the major industry in my constituency. The provisions are welcome moves in the right direction, as my hon. Friend outlined. The real issue is that none of us wants this to be too little, too late. That is the danger of where we lie with this self-inflicted wound by the coalition Government in relation to the carbon floor tax. They unilaterally introduced it without doing the proper homework on putting appropriate mitigations in place through the European Union.

It is amazing that the Government managed to come up with a tax that united the green lobby—Greenpeace, Friends of the Earth and others—and foundation industries such as glass, steel and chemicals in saying that this was a poor tax. To have achieved that is a work of genius. The tax is flawed at its kernel. We now have an attempt to row back that does not do anything, in the Government’s prospect, until April 2016 when a freeze will be put in place.

There is a danger of the rhetoric around this sounding as though it is doing something when it actually does nothing at all. Foundation industries need action now to ensure that they can continue to play their important role in the country’s wealth creation. As my hon. Friend indicated, we have international investors, often based outside the UK, such as Tata, making decisions about investment in our industries. The uncompetitive nature of energy prices is one of those marginal issues that, if not tackled, can make the difference between investing and not investing. That would not be good for anybody.

The other irony is that, as the Chancellor observed, if UK industry is made uncompetitive through self-inflicted wounds, all that happens is that carbon leakage is exported elsewhere. Places such as Ukraine end up as the steelmakers and release far more carbon into the environment than our highly efficient plants do at the moment. That has all the ingredients of the economics of the madhouse.

Christopher Pincher (Conservative, Tamworth)

I take on board the hon. Gentleman’s point about carbon leakage. Is he therefore suggesting that it would be politic for the Government to switch from measuring carbon emissions by production to measuring them by consumption?

Nicholas Dakin (Labour, Scunthorpe)

That is a technical area that the Government need to look at. The hon. Gentleman makes a good point in raising how the measures are achieved. That also illustrates that it is an area where we must have global agreement to take it forward. That means that sometimes steps are slower than they need to be to address the massive challenge of climate change.

Karl-Ulrich Köhler, chief executive of Tata Steel Europe, commented after the Finance Act 2011 introduced the carbon floor tax. His analysis is that energy bills for foundation industry businesses in the UK are 50% higher than for equivalent businesses elsewhere—he runs equivalent businesses in France, Germany and the Netherlands, so he has illustrative data from his own business portfolio. In essence, that is the equivalent of an extra £5 per tonne of steel manufactured in the UK, compared with elsewhere in Europe, which equates to about 2,000 jobs, if labour costs must be reduced to manage the energy margin of difference. Therefore, it is significant to UK foundation industries.

I welcome the fact that the Business Secretary and others have committed to putting their shoulders to the wheel to ensure that our foundation industries can perform. In April 2014, I asked the Minister of State, Department of Energy and Climate Change, the right hon. Member for Sevenoaks—an excellent Minister who strives to do his very best—to ensure the mitigation for the carbon floor price that the Government are striving to get through Europe is backdated to April 2013. He said he would do his best, but he could not guarantee it. That is not good enough. Our foundation industries deserve the support that Members of all parties promise in their rhetoric. Those industries need more than rhetoric; they need action.

My worry is that the coalition Government, with their self-inflicted wound of the carbon floor tax—they can blame nobody else for it—cannot box themselves out of their corner. They ought to be doing something now; 2016 is better than nothing, but they may not be in government in 2016. That is a long way away for the people toiling in the steel, glass and chemicals industries who create this country’s wealth. We need those people for the future.

I know we set up review after review, but I welcome the tenor of amendment 25, which aims to keep this under wraps. We should try to do whatever we can to drive this issue forward by reviewing the impact on leakage of jobs in the UK. None of us wants what we fear might happen if we do not act appropriately and urgently.

Chris Heaton-Harris (Conservative, Daventry)

It is a pleasure to serve under your chairmanship, Mr Caton. I want to follow on from the hon. Gentleman’s comments. I have been monitoring energy costs in the United Kingdom for a long time, and I am fascinated by the various carbon taxes, including the carbon floor price, and by the way Tata Steel goes about its business. It is a remarkably fluid global enterprise that can choose where it goes in the global market.

The hon. Gentleman mentioned Karl-Ulrich Köhler, the chief executive of Tata Steel Europe, and I have a quote of his that I carry around as a reminder. After Tata Steel announced a number of redundancies in its Port Talbot works, he said:

“European steel demand this year is expected to be only two-thirds of pre-crisis levels after falls in the last two years”—

he is talking about the problem with the economy. He continued:

“On top of the challenging economic conditions, rules covering energy and the environment in Europe and the UK threaten to impose huge additional costs.”

The dilemma for him personally and for us all is that nearly all parties are committed to decarbonising the economy. The carbon floor prices and the carbon taxes associated with them are one of the methods for doing that. However, the consequence of doing that does not look good for energy-intensive users.

I do not see the point in a review. Our direction of travel seems perfectly logical, and I think people are beginning to recognise the issue now. There needs to be a more sensible conversation. If we want to retain a strong and well-founded—forgive the pun—steel industry in this country, as well as all the other heavy industry companies that use lots and lots of energy and employ thousands upon thousands of people across the midlands and across the country, we need to have a very sensible conversation about energy provision, carbon floor prices and carbon levies.

Ian Swales (Liberal Democrat, Redcar)

I feel I ought to rise to say a few words since my constituency is heavily affected by the debate we are having now. It is mainly my constituency that the shadow Minister was referring to regarding her visit to Teesside. In my constituency, we have a huge steel industry. We have Tata, SSI—a Thai company—and the UK’s biggest chemical site, so I see the issues writ very large. In addition to all the points already made, all of which I agree with, we need to talk about complexity.

Businesses in my constituency talk about having seven different forms of taxation or measures regarding the energy that they use. Merely navigating that minefield is one of the problems that they speak about. They have issues, not to do with this House, but regarding changes taking place in Europe around reductions in the emissions trading system, which are beating on them, but obviously beating on other industries around Europe. It is vital that we keep a close eye on this and make sure that UK-based industries are not at a disadvantage. We must not believe all the headline energy prices that are published, because, as Tata and others know, the prices they pay are not always the ones that seem to be in the press.

I know the Energy Minister was quite shocked when he visited Germany, and it affected his view when he found out what the real market was for industrial energy in Germany, as opposed to the average prices that we might see published in the press. For example, industry in Germany pays far lower prices than domestic consumers pay, so that area definitely needs to be under review. The Government need to take a wider view of their income stream, because one thing that has not been mentioned is that for all the taxes they get from energy, there are also lots of taxes from employment, from businesses, and from profits and so on, and if we drive businesses out of this country, they clearly will be lost.

Finally, energy-intensive industries have a vested interest in reducing energy costs. They already pay a lot for their energy. They are being beaten with five or six sticks already. There is a limit to how many sticks they need to be beaten with before they look at how much energy they use and how much carbon they generate. Many industries, such as ammonium nitrate manufacturers, are inherently energy intensive. There is nothing we can do—it is all about chemistry and physics—so we need to make sure that the Government show that they welcome such businesses and put policies in place to ensure that they stay here and thrive.

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

Amber Rudd (Conservative, Hastings and Rye)

I beg to move, That the Order of the Committee of 29 April be amended as follows:

‘In paragraph (1) (g), leave out the words “11.30 a.m. and”.’

The motion will cancel the Committee’s planned sitting on the morning of Thursday 12 June, although we will still meet at 2 pm on that day.

Clause 90 - Climate change levy: main rates for 2015-16

Gary Streeter (Conservative, South West Devon)

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

Clause 91 stand part.

Amendment 25, in clause 92, page 84, line 16, at end insert—

‘(3) The section shall not come into force except as specified in subsection (2) below.

(1) The Chancellor of the Exchequer shall bring the section into force by order within six months of the passing of this Act.

(2) A statutory instrument containing an order under subsection (3) shall be accompanied by a report which details—

(a) the impact of the provisions in the section on consumers and on fuel poverty;

(b) the impact of the provisions in the section on energy-intensive industries and on employment in those industries;

(c) the level of carbon leakage in the energy-intensive industry as a result of the provisions in this section;

(d) the effect of the provisions in the section on investment in new renewable power generation and on investment in new nuclear power generation;

(e) any effective subsidy provided to, or additional profits accruing to, operators of existing and new nuclear power stations as a result of the provisions in the section;

(f) what additional package of measures will be enacted to mitigate the impact of the section on energy-intensive industries;

(g) the impact on business investment of—

(i) changes to Schedule 6 to the Finance Act 2000 made by Finance Act 2011;

(ii) changes to Schedule 6 to the Finance Act 2000 made by this Act.”

Clauses 92 and 93 stand part.

That schedule 16 be the Sixteenth schedule to the Bill.

Nicky Morgan (Conservative, Loughborough)

It is a pleasure to serve under your chairmanship, Mr Streeter. We have had an interesting debate on this grouping, and I thank all hon. Members for their contributions.

Clauses 90 to 93 and schedule 16 make changes to the main rates and carbon price support rates of the climate change levy. They provide for exemptions from the levy for energy used in metallurgical and mineralogical processes.

The climate change levy is designed to encourage the efficient use of energy and to reduce emissions by creating an incentive to use less energy and to source electricity from renewable sources. Clause 90 increases the main rates of the levy in line with the retail prices index from 1 April 2015, as has been standard practice since 2007. The new rates will apply to supplies of taxable commodities made to business and the public sector on or after that date. That will ensure that the main rates of levy remain constant in real terms and that the levy maintains its environmental impact by encouraging businesses to reduce their energy use. Consistent with previous increases, the rates are being announced a year before they come into effect to enable business to prepare and to give time for energy suppliers to get their billing systems ready.

On clause 91, the carbon price floor that came into effect on 1 April 2013 has two components: the market price for carbon under the EU emissions trading system; and a UK-only element, which is the carbon price support rate per tonne of carbon dioxide. Legislation sets out the carbon price support rates for the individual taxable commodities and, to provide certainty, those rates are announced two years in advance.

An ambiguity in published data affected the calculation of the solid fossil fuel rates included in the Finance Act 2013. The clause corrects the carbon price support rates of climate change levy for coal and other solid fuels for 2014-15 and 2015-16 to ensure that they are consistent with how the rates for other commodities have been set.

As I go through the clauses, I will try to answer the questions asked by the hon. Member for Newcastle upon Tyne North. On the error in the calculation, carbon price support rates per taxable commodity are calculated by applying the carbon emission factor for each commodity to the underlying rate per tonne of carbon. In the case of solid fossil fuels, the carbon price support rate of the climate change levy is set in pounds per gigajoule of energy content. The previous legislated rates were calculated using Department of Energy and Climate Change data on the calorific value of coal used in power stations and Department for Environment, Food and Rural Affairs data on carbon dioxide released from coal used in electricity generation.

Unfortunately, the ambiguity in the published data affected the calculation of the solid fossil fuel rates in the 2013 Act. The calorific value of coal burned by generators was found to reflect the energy content of only UK-produced coal, but imported coal is consumed in UK power stations, and that often has a higher calorific content per tonne than UK coal, and therefore a lower carbon emission factor per gigajoule. As a result, the carbon price support rates for the two years I mentioned were set too high, resulting in coal-fired power stations being taxed more per tonne of carbon emitted than other forms of electricity generation, which was contrary to the Government’s intention. I stress that the methodology is sound and has not been altered as a result of identifying the ambiguity. The ambiguity in the published data has now been corrected by officials.

The hon. Lady asked about the amendment of the rate. The error was not identified in time to correct the rate for 2013-14, and the Government do not intend to amend it retrospectively, because generators sold their output in 2013-14 at prices reflecting the tax rate that was then in force, so any rebate would effectively constitute a straight windfall to the generators.

The Committee will be aware that the Government announced in the Budget their intention to cap the carbon price support rate per tonne of carbon dioxide at a maximum of £18 from 2016-17 until 2019-20. Clause 92 achieves that by setting carbon price support rates for individual taxable commodities with effect from 1 April 2016. Effective carbon pricing, including through the carbon price floor, remains an important part of the Government’s energy policy. Establishing a minimum carbon price sends a credible signal to help to drive billions of pounds of investment in low-carbon electricity generation. Investment in the energy market will help to ensure that the UK meets its legally binding carbon dioxide emissions reduction targets and to safeguard the country’s long-term energy security.

However, as we heard from my hon. Friend the Member for Redcar, ensuring that UK industry remains competitive in the world is a priority, and the Government acknowledge that rising energy costs are a key issue for many businesses. The failure of the EU to agree to substantial reform of the emissions trading system has meant that the European carbon price has remained far lower than previously expected. Without action on the carbon price floor, the drop in the price of carbon will mean that, in a few years, British firms will be at an unacceptable competitive disadvantage compared with their competitors in the EU. In 2018-19, the Government forecast a European carbon price of around £6 which, under the carbon price floor trajectory, would see the Government setting a UK-only carbon tax of around £30 per tonne of carbon dioxide for that year. The Government are therefore limiting the disparity with the EU on carbon prices by capping the carbon price support rate per tonne of carbon dioxide at £18 from 2016-17 to the end of the decade.

Nicholas Dakin (Labour, Scunthorpe)

Why not introduce the cap a year earlier and therefore bring more timely relief to those industries that are challenged?

Nicky Morgan (Conservative, Loughborough)

My understanding is that, because the rates are set two years in advance, unfortunately this is not as easy as just changing the rate, as people have started pricing and purchasing energy on the basis of the rate set two years ago. Though such a change might seem easy to us as politicians, the process is more complicated for those companies in the sector.

The £18 cap will be achieved by setting in clause 92 the carbon price support rates of climate change levy for gas, solid fuels and liquefied petroleum gas from 1 April 2016.

The Opposition’s amendment 25 would require the Chancellor of the Exchequer, six months after the passing of the Bill, to publish a report detailing the impact of clause 92. I am pleased to say that capping the carbon price support rates will reduce electricity bills for all businesses. By 2018-19, businesses will have saved around £4 billion, and a typical uncompensated energy-intensive firm will save around £800,000 in 2018-19. In 2018-19, capping the carbon price floor should take £15 off the average household bill, which will be in addition to the £50 on average that the Government have saved for households through the changes they announced at the autumn statement. That demonstrates that the Government continue to take decisive action to reduce people’s energy bills. That is on top of other measures announced at Budget 2014 to help to reduce businesses’ electricity bills, including the introduction of compensation to electricity-intensive industries for the costs of the renewables obligation and feed-in tariffs in 2016-17, and the extension of compensation for the costs of the carbon price floor until the end of the decade. That is why the CBI said that the Budget

“will put wind in the sails of business investment, especially for manufacturers.”

This is all without compromising the Government’s commitment to developing renewable energy. The established levy control framework arrangements and budget provide the flexibility to achieve the investment in growth that is needed to tackle climate change and meet the Government’s renewable energy target.

I can therefore reassure Labour Members that their amendment is not necessary. The Budget’s energy package clearly shows that the Government are taking decisive action to mitigate the impact of energy policies on households and businesses. Furthermore, the Government keep all tax policy under review, with Her Majesty’s Revenue and Customs and HM Treasury routinely monitoring the impact of such changes. The review under the amendment would start six months after the Bill received Royal Assent, but clause 92 does not come into effect until 18 months later, so the amendment would provide a review of something that had not come into effect. Capping the carbon price support rate at £18 per tonne of CO2 from 2016-17 to the end of the decade will limit any competitive disadvantage that British companies face in the global race and save billions of pounds for British industry.

The hon. Member for Newcastle upon Tyne North asked about the price of carbon under the EU ETS in 2020. It is not expected to be much higher than at present—about €5—but in 2013, the price of carbon was predicted to be €70, which shows the differential between what was expected to happen and what has actually happened. On the relationship and the discussions that we are having about the ETS scheme, the UK supports the cancellation of surplus allowances within the EU ETS to raise the ETS price, and our negotiations in Europe to achieve that are ongoing.

The hon. Member for Scunthorpe asked about the carbon price floor compensation, when it would start and whether it would be backdated. The UK received state aid clearance for the CPF compensation scheme at the end of May. We are finalising the administration of the scheme and will begin making payments as soon as possible. I am sure that he will chase me if that does not happen for the companies in his constituency. The UK is still considering the feasibility of pursuing backdating in light of the newly published Commission energy and environment aid guidelines. Compensation is being paid for the EU ETS as well.

The hon. Member for Newcastle upon Tyne North asked about what estimate has been made of the impact of the carbon price floor on fuel poverty. I do not have the answers to hand, so I will have to write to her about that, but it was a good question to ask.

Clause 93 introduces schedule 16, which provides for exemptions from the climate change levy for energy used in metallurgical and mineralogical processes. The exemptions came into force on 1 April 2014 under a resolution passed by the House at the end of the Budget debate. To ensure that the benefit of the measure is widely felt and to avoid potential state aid problems that could result from selectivity, energy used by all mineralogical and metallurgical businesses qualifies for the exemptions.

In the 2013 Budget, the Chancellor announced that the Government would introduce new exemptions for energy used in metallurgical and mineralogical processes. Exemptions for those purposes are permitted under the energy taxation directive and have long been in place in some other member states giving full relief rather than the partial relief available to those processes under the climate change agreement scheme. Since that announcement was made, officials have worked closely with trade bodies on the design of the exemptions. As a result of that consultation, the Government announced in the 2014 Budget that they would allow businesses that benefit from the exemptions to retain climate change agreements, which will ensure that businesses undertaking mineralogical and metallurgical processes will be able to benefit from reduced climate change levy rates on any energy they use that does not qualify for the new exemptions, rather than paying the climate change levy at the full rates on that energy. In addition, legislation has been amended to ensure that businesses that opt to terminate their climate change agreements do not become subject to the carbon reduction commitment energy efficiency scheme. The new exemptions will support UK manufacturing by reducing the burden of energy taxation on some of the most highly energy-intensive processes and helping such businesses to remain competitive with their counterparts in the EU and further abroad.

The hon. Lady asked about other member states’ exemption of energy used in these processes. Member states such as France and Germany that have a comparable industrial base have similar exemptions in their energy taxation systems. She asked why the Government were introducing the exemptions now. When the European Commission declined in 2011 to renew the state aid approval for full exemption from the climate change levy for energy used in metal recycling processes—the Commission would agree only to a lower rate—the Government decided to review the whole climate change levy treatment in that area. Following representations from other energy-intensive industries, it decided to extend the review beyond metal recycling.

Commercial energy prices have increased markedly since the climate change levy was introduced, putting greater financial pressure on highly energy-intensive sectors. The Government believe that the time has come to align our treatment of those industries with that of competitors in other member states.

I hope that I have explained the clauses and addressed the points that have been raised. I commend the clauses and schedule to the Committee, and ask the hon. Member for Newcastle upon Tyne North not to press amendment 25 to a Division.

Clause 92 - Climate change levy: carbon price support rates for 2016-17

Clause 94 - Rates of landfill tax

Catherine McKinnell (Labour, Newcastle upon Tyne North)

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

Clause 94 provides for rates of landfill tax to be uprated in line with inflation. The standard rate of landfill tax from 1 April 2014 is £80 per tonne, while the lower rate, applying to less-polluting qualifying waste, is £2.50 per tonne. When the tax was first introduced, the standard rate was £7 and the lower rate was £2. However, following concerns about the limited environmental impact that the new tax was having, the standard rate of the tax has been increased consistently since 1999.

In 1999, the last Labour Government committed to increasing the rate of the tax by at least £1 per tonne each year. The duty escalator was increased to £3 per tonne in 2005 and £8 per tonne in 2007. In the 2009 pre-Budget report, the Government stated that that would continue until at least 2013—a policy that the coalition Government have continued to commit to, including in this year’s Finance Bill. Indeed, the Budget confirmed that landfill tax rates will continue to rise by RPI, rounded to the nearest 5p, beyond 2015.

According to a House of Commons Library note from 2009, the proportion of waste sent to landfill from the introduction of the tax up to 2009 fell by around a third, and that was accompanied by a similar increase in recycling. I am interested to hear whether the Minister could provide the Committee with more recent figures on waste sent to landfill, as well as levels of recycling, to update those outlined in the Library note from 2009.

Budget 2014 announced changes to the landfill communities fund—the tax credit scheme that enables operators of landfill sites to contribute money to organisations advocating projects that create significant environmental benefits and jobs and that improve the lives of communities living near landfill sites. The Budget outlined the changes as follows:

“The value of the landfill communities fund for 2014-15 will be reduced to £71 million...This reduction takes account of progress that environmental bodies have made to address the government’s challenge to reduce unspent funds.”

Can the Minister elaborate any further on that reduction? I have a personal interest in hearing her views, as I have seen first hand the benefit that this fund has had in my constituency. Last year, for example, I opened a newly refurbished tennis facility in Gosforth garden village—a village that was originally built for railway workers in the 1920s. The new facilities were 90% funded by the landfill communities fund and make a tremendous contribution to local sporting facilities. Turning back to the Budget, as a result of the reduction in the fund, the Chancellor also announced that the saving would be used to tackle waste crime.

Finally, following industry engagement to address compliance, Budget 2014 announced that the Government would introduce a “loss on ignition” testing regime on fines—the residual waste from waste processing—from waste transfer stations by April 2015. The Budget document announced:

“Only fines below a 10 per cent threshold would be considered eligible for the lower rate,”

and that full proposals would be consulted on later this year.

I would be grateful if the Minister could elaborate on those points. Can he set out even a ballpark figure for the landfill tax rates that the Government are considering? The Government have already committed to inflationary increases in landfill tax rates up to 2019, so are they considering options over and above those that have been set out? Are they considering above-inflation increases in landfill tax rates, for instance, or are they instead looking at different rates of tax for different types of waste disposal? These points seem to be unclear at present and any degree of certainty that the Minister can provide now would, I am sure, be helpful to the industry and the Committee today.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship once again, Mr Streeter, and to respond briefly to our debate on clause 94, which, as we have heard, increases the standard rate of landfill tax from £80 per tonne to £82.60 per tonne, and the lower rate from £2.50 per tonne to £2.60 per tonne. Both rates take effect from 1 April 2015.

The landfill tax has been immensely successful in reducing the amount of waste sent to landfill. The hon. Lady set out the numbers she had from, I think, a 2009 Library note. I can tell her that since the introduction of the tax, the amount of waste sent to landfill has more than halved and recycling rates have increased threefold. I am happy to write to her with more detailed numbers if that would be of assistance, but I hope that those numbers give an indication that the trend that was clearly in place in 2009 has continued.

If waste is not sent to landfill, it goes to alternative, more sustainable waste management practices, such as recycling. As I have said, there have been significant increases in recycling, with a threefold increase. The Government have recognised the importance of providing tax certainty, so that industry has the confidence to invest in alternative waste management processes. The June Budget in 2010 confirmed that the standard rate of landfill tax would increase by £8 per tonne each year until 2014. The Government also confirmed that the rate would not fall below £80 per tonne between 2014 and 2020.

The pre-announced standard rate increases enjoyed the support of business groups, including the CBI and the Environmental Services Association, which regarded the escalator as providing certainty for long-term investment decisions. The clause provides further certainty for future standard and lower rates by confirming that they will not be eroded by inflation in future years. That means that businesses can have the confidence to invest in new waste treatment facilities, safe in the knowledge that it will not suddenly become cheaper in the near future for waste to be sent to landfill again. The rates will both rise with RPI in 2015-16, rounded to the nearest 5p. That means that the lower rate will be £2.60 and the standard rate will be £82.60.

The increase in landfill tax will affect businesses and local authorities that send waste to landfill. By managing waste more sustainably and reducing the amount of waste they send to landfill, businesses and local authorities will be able to reduce their landfill tax liability. I know that some in the industry were looking for the Budget to give similar certainty to that delivered through the standard rate escalator, but I believe it is crucial to establish a level playing field in the industry before any further decisions are taken on rates over the longer term. The success of this tax has offered a small minority of unscrupulous individuals an incentive to try to make a quick buck by avoiding the tax or mis-describing material. The Government will work with the industry to address compliance issues. A consultation document will be published later this year. For the reasons I have outlined, there is nothing more I can say in response to the hon. Lady’s question on future rates.

On the landfill communities fund, the Government have always been clear that overall progress to meet the challenge will inform the fund’s future value. Although a large number of environmental bodies have addressed the challenge, others have not, with a small number now holding more unspent funds than at the start of the challenge. The size of the reduction balances the excellent efforts that many environmental bodies have made to address the challenge against the progress of the challenge as a whole. Crucially, the saving is going back to help local communities by addressing concerns raised by the industry about waste crime. Combating waste crime fits with the spirit of the LCF, which is designed to address some of the environmental disadvantages of living in the vicinity of a landfill site. DEFRA advises that 80% of illegal sites in England are within 5 km of a legitimate landfill site.

Clause 94 increases the rate of landfill tax by inflation, as announced at Budget 2014. As I have set out, the clause not only helps the Government towards their goal of creating a zero-waste economy, but provides certainty so that businesses and local authorities can plan their future waste disposal. I therefore hope that the clause will stand part of the Bill.

Clause 95 - Goods carried as stores

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 95 clarifies the law by introducing schedule 17, which makes provisions for the treatment of goods carried onboard as part of a ship or aircraft’s stores. Put simply, the measure addresses legislation and regulations concerning the storage and sale of duty-free goods.

I have a couple of queries for the Minister. The clause provides for penalties in certain circumstances, but will he clarify exactly what those penalties will entail? What, for example, will the penalty be for those who contravene any of the new provisions? Conversely, what will the penalty be for those who fail to make a required declaration under the new regulations, in addition to paying any duty due? As the tax information and impact note helpfully explains, schedule 17 amends section 1(4) of the Customs and Excise Management Act 1979 to provide that goods for sale to persons carried on a ship or aircraft will be treated as stores if they are to be sold by retail in the course of a journey made by the ship or aircraft, but the measure omits a reference to “relevant journey,” as under section 1(4) of CEMA, and instead provides that eligible journeys will be specified or defined by regulation. Will the Minister clarify how the change will work in practice?

David Gauke (Conservative, South West Hertfordshire)

Clause 95 and schedule 17 will support the growth of the shipping and aircraft industries by enabling them to simplify procedures and streamline operations, thereby reducing burdens. The changes will provide flexibility to facilitate trade practices and increase controls on areas of revenue risk, which will enable HMRC and Border Force to work with the industry to improve compliance and is in line with our wider commitment to bring customs and excise law up to date to protect customs and excise revenues.

It may be helpful to provide a little background to this discrete area of law. In August 2011, HMRC issued a consultative document entitled “Modernising Customs and Excise Law”, which highlighted a need to bring customs and excise law up to date to protect revenues, reduce the tax gap and better reflect modern trade practices. HMRC announced that it was the intention to reassess the requirements and legislation currently used to control ships and aircraft duty-free stores to include compliance in this area.

The measure will provide that goods for sale to persons carried on a ship or aircraft will be treated as stores if they are sold by retail in the course of the journey made by the ship or aircraft. It will clarify that surplus stores can remain on board the ship or aircraft without payment of duty. The journeys on which stores can be shipped or carried without payment of duty will be specified in regulations, enabling trade and HMRC to respond quickly and flexibly to changes in business requirements. The power to make regulations will come into force on the date that the Finance Bill 2014 receives Royal Assent.

The changes made are expected to have a negligible impact on most businesses. The cruise ship and airline industry will benefit from the introduction of procedures to account for duty retrospectively on stores consumed in port or on an intra-UK flight. Penalties will affect only individuals and businesses that contravene a provision of the regulations, fail to make a return or do not pay the required amount of duty due. All penalties are subject to reasonable excuse and mitigation consideration. In the majority of cases, a penalty notice will not be issued without the trader first having had a warning letter.

New regulations for an authorisation procedure to control goods moving from warehouses to be shipped as stores will impose some new requirements, but this will impact on a small number of specific businesses and, as I said earlier, the introduction of penalties will not affect compliant businesses. “Relevant journey” will be defined in regulations, which will allow the flexibility to respond to changing commercial practices to facilitate trade. We believe that is a pragmatic response. With those remarks and clarifications, I hope that the clause and schedule will stand part of the Bill.

Clause 96 - Penalties under section 26 of FA 2003: extension to excise duty

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clause 96 relates to the applicable penalties in respect of undeclared goods imported in excess of the allowance from non-EU countries in specific circumstances. It provides for a customs civil penalty in cases where there is no allegation of dishonest conduct, but where goods are wrongfully imported from a non-EU country. The explanatory notes suggest that the new civil penalty will be introduced by secondary legislation, although it is worth noting that the current policy states that the minimum penalty is £250, which is the first penalty in all but the most serious cases.

I have one question for the Minister. Will the same penalty regime be implemented through secondary legislation with respect to imported goods from non-EU countries—the circumstances that this clause will apply to? As far as I understand it, neither the tax information and impact note nor the explanatory note explicitly state what penalty will apply where such behaviour is deliberate. I would be grateful if the Minister could clarify whether the penalty will apply in the way I have set out, or whether it will be affected by the secondary legislation that the Government propose to introduce to deal with the new civil penalty for the non-deliberate import of non-EU goods.

David Gauke (Conservative, South West Hertfordshire)

Clause 96 will provide for the issue of a customs civil penalty to travellers entering the UK from outside the EU who fail to declare goods in excess of their allowance when stopped before clearing customs controls. The penalty will be used in cases where no dishonest conduct is found, as an alternative to existing penalties, to allow more flexibility in cases of less serious contraventions.

Currently, there is no ability to issue a civil penalty in cases of non-deliberate behaviour, the result of which has been inequity of treatment between EU and third-country travellers. There is a criminal penalty for a failure to declare such goods and a customs civil evasions penalty for cases where HMRC finds dishonest behaviour. However, clause 96 will provide a method for penalising non-compliance where dishonest behaviour is not found and where criminal prosecution would not be appropriate. The clause ensures a level playing field for issuing penalties for excise goods wrongly imported from a non-EU country, as well as those wrongly imported from an EU country. The proposed penalties will address the current risk of reputational damage relating to having a penalty for only intra-EU travellers. It will also protect revenue and support HMRC’s excise strategies.

The schedule sets the maximum penalty for the contravention of a customs provision at either £1,000 or £2,500. There are no fixed penalties. The minimum penalty is £250, which will be the first penalty in all but the most serious cases. Penalties for subsequent contraventions will be issued in progressively larger amounts until the maximum is reached. The normal progression will be £250, £500 and £1,000, with additional steps of £2,000 and £2,500 for the higher maximum. All penalties, including the minimum £250, will be subject to reasonable excuse and mitigation consideration. In the majority of cases a penalty notice will not be issued without the trader first having had a warning letter.

I hope that information on penalties helps the Committee, and I hope I have been able to set out how the penalty fits within the wider set of sanctions that are available. I hope the clause stands part of the Bill.

Clause 97 - VAT: special schemes

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to consider the following:

Clauses 98 to 100 stand part.

That schedule 18 be the Eighteenth schedule to the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

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

Clause 97 will change where VAT is charged as part of the final stage of the 2008 European agreement on changes to the VAT place of supply of services rules. I will come to its details shortly, as it is the main event, as it were, among the measures in the group, because clauses 98 to 100 are effectively supporting technical clauses.

At the moment, the Value Added Tax Act 1994 treats bodies corporate that are not in business as belonging in the country in which they are legally constituted. Clause 98 will change the place of belonging to the place of establishment, which is usually the principal place of business or head office, rather than where the business is legally constituted. The clause also introduces an explicit reference to “permanent address”.

Clause 99 will allow

“section 97A of VATA 1994…to be ignored…in relation to supplies made on or after 1 January 2015”.

In line with clause 97, it makes provision

“about the place of supply of electronically supplied services, telecommunication services and radio and television broadcasting services.”

Clause 100 disapplies the UK’s exemption from article 28 of the principal VAT directive of 2006 for telecommunication and electronically supplied services. The exemption currently allows the UK to see supplies through agents acting in their own name as though they were made by the agent.

The background to the clauses is that changes will be made on 1 January 2015 to the European Union VAT rules on place of supply of services involving business-to- consumer supplies of broadcasting, telecommunications and e-services—BTE. Those changes are being introduced as part of the final stage of the 2008 European agreement on changes to the VAT place of supply of services rules. As to what is covered by BTE, broadcasting relates to radio or TV programmes delivered over a TV network or the internet. Telecommunications refers to fixed or mobile telephone services for voice or data, and voice over internet protocol—delivering voice and communications services online. E-services relates to electronic services that are paid for and delivered over the internet, that are essentially automated, and that cannot be provided without IT. Such services include downloaded screensavers, films and games, traffic reports, digital newspapers and software upgrades, and website hosting, firewalls and online data warehousing.

At present, BTE supplies are taxed where the supplier is based. The changes will mean that, from 1 January 2015, the place of taxation will be where the customer is based. That significant change requires suppliers to keep track of additional information about the countries in which VAT will be due. To save suppliers from having to register for VAT in every single EU member state, a VAT mini one-stop shop online service has been established, which will allow the EU supplier of e-services to elect to register with the VAT authority of their country of identification and file a single VAT return detailing the supplies made to consumers in other member states, and to pay the tax in a single payment to the state of identification.

That is an extension of the scheme that was introduced for non-EU businesses in 2003 to file a single VAT return in the member state of identification, and to submit a single VAT return accounting for all VAT in all member states of consumption. The tax authority in the state of identification will be responsible for redistributing the VAT to the member state of the customer, which should relieve businesses of the burden of filing multiple VAT registrations and making multiple payments.

The system will go live on 1 January 2015, but suppliers can register to use it from October 2014. EU businesses can register to use the Union VAT MOSS online service in the member state in which the business establishment is based, which is usually the principal place of business or head office. The VAT MOSS online service is the collective name for two schemes. I have mentioned the Union scheme, but there is also a non-Union scheme for suppliers that are not established in the EU. They can register in the member state of their choosing to account for the VAT on all their BTE supplies within the EU on one MOSS VAT return.

There is a useful example on the HMRC website that shows what happens if someone registers for the VAT MOSS online service in the UK. People will be able to account for the VAT due on all their business-to-consumer BTE sales in any member state by submitting a single VAT MOSS return and any related payment to HMRC. HMRC will then send an electronic copy of the appropriate part of the VAT MOSS return and the related VAT payment to each relevant member state’s tax authority on their behalf. The VAT rate used will be that of each member state of consumption at the time the service was supplied. The HMRC website also helpfully sets out clarification about how individual businesses are to decide where customers are based.

Concern has been raised about the proposals, primarily by the Institute of Chartered Accountants in England and Wales, which notes:

“The principle behind the changes is to provide a level playing field for service providers.”

It says that, at the moment,

“it is possible…for a service provider to provide services to consumers across the EU but be based in an EU country with a low VAT rate that is charged to all consumers, enabling them to undercut service providers in the other EU country who must charge customers the local higher VAT rate.”

Although the ICAEW supports the proposals in principle, it is concerned that the price of the level playing field could lead to the creation of

“considerably more complexity and administrative burdens that could discourage intra-EU trade and the efficient operation of the single market.”

It would be helpful if the Minister responded to those concerns, gave his assessment of the proposals, and told us whether he fears that they might have the results that the ICAEW highlights.

The ICAEW also states:

“In addition HMRC has indicated that it intends educational services, such as webinars, to be exempt from these regulations as a service of education provided where the service is hosted. However there remain ongoing discussions at EU level as to exactly what services would be categorised as e-services, and in the absence of clear agreement at EU level there is a danger that different countries will treat similar transactions differently.”

It notes that there is

“a danger that some businesses could find themselves providing services that are subject to double or non-taxation.”

Will the Minister comment on whether such uncertainty may lead to double taxation or non-taxation, and give us his assessment of those concerns? Is he worried that we do not yet have the result of ongoing EU discussions about exactly what services will be classified as e-services? Is there a danger that different countries may end up treating transactions differently?

Will the Minister outline his plans for publicising these changes and the launch of the VAT MOSS online service to minimise non-compliance and confusion for businesses? Clearly the change will require fundamental changes to existing IT systems. Is he confident that the new systems will all be fully functional by 1 January next year? How are the system upgrades progressing to date?

David Gauke (Conservative, South West Hertfordshire)

As we heard, clauses 97 to 100 form part of a package to amend the UK’s VAT system to provide that supplies of broadcasting, telecommunications and electronically supplied services to UK consumers will be taxed in the UK. They also introduce optional accounting schemes, called the mini one-stop shop, that will allow businesses to submit a single return for payment for their EU digital supplies to consumers in all member states where they are not established. The final element of the package will be a statutory instrument, which has already been exposed to consultation and will be introduced later in the year. Together, the measures will ensure that there is a level playing field for businesses by ensuring that those located in countries with low VAT rates, such as Luxembourg, can no longer undercut UK-based businesses.

The clauses, along with secondary legislation to which I referred, form the final part of a package of VAT changes that was agreed across the European Union in 2008 to align taxation better with the place of consumption. Currently, intra-Community supplies of broadcasting, telecommunications and e-services—known together as digital services—to non-business customers are subject to VAT in the member state where the supplier belongs. From 1 January 2015, that will change to the member state where the customer belongs, which will ensure that UK consumers pay UK VAT no matter where the supplier of the services belongs. The change could increase administration costs for suppliers, as they are potentially liable to register and account for VAT in each member state where they have customers so, as I mentioned, we are introducing an IT system called the mini one-stop shop that gives suppliers the option to register in just one member state. They may then account for the VAT due on supplies of digital services in respect of all their EU customers in the other member states on a single VAT return.

After strong lobbying from the UK, the EU agreed changes to ensure that app stores and other internet portals will normally be responsible for accounting for the VAT on downloads to consumers, which will simplify accounting for many small businesses. We are also changing the place where a non-business legal person belongs for VAT purposes, which will help to ensure that the UK system is consistent with our EU partners preventing some supplies potentially not to be taxed.

The changes made by clauses 97 to 100, along with the secondary legislation, will ensure that digital services are taxed in the place of consumption. The change is expected to result in an additional £300 million of revenue a year. It also removes an incentive for some businesses to consider locating elsewhere in the EU. The change will have an impact on large businesses that provide telecommunication and broadcasting services, and suppliers of electronic marketplaces such as electronic bookstores and app stores. It will affect many small providers of electronic services, such as software developers. We estimate that 34,000 businesses will be affected and the total additional costs of complying with the change will be £2.2 million a year, taking into account the benefits of the mini one-stop shop.

Let me respond to the questions raised by the hon. Member for Birmingham, Ladywood. She asked about an increase in administrative burdens, which I touched on in my earlier remarks. It is worth pointing out that businesses have been invited to contribute to the design and implementation of practicalities arising from the legislative change. The IT system has been designed with help from interested parties in the business community. Simplifications have been agreed by member states to make the process easier for businesses to administer.

In terms of whether this measure makes it more difficult for UK businesses to trade with EU customers and the impact on competition among member states, any potential disadvantage caused by member states’ differing VAT rates will be removed, as all suppliers of digital services will apply the VAT rate appropriate to their customers’ country. There is no reason to believe that UK suppliers will be at a disadvantage compared with their competitors.

As for whether different countries will treat different services differently, e-services are clearly defined as services requiring little or no human intervention, so there should not be different treatment by different member states. However, we will, of course, continue to keep the matter under review.

On the question of what is being done to publicise the changes, the European Commission has published interim guidance on its website and is holding road shows throughout Europe, one of which has just been held in London. HMRC has published its own guidance and is engaged with stakeholder groups, and with industry and its representatives. HMRC will continue to publish guidance on an ongoing basis, and some information is already on its website.

I can reassure the Committee that the UK system is on course to be delivered on time. The Commission is monitoring developments in each member state and a fall-back system will be available if a member state cannot deliver its system on time. I am reassured—I hope that the Committee will be reassured—that, from the perspective of the UK, everything appears to be on course.

A sense of fairness is relevant to digital services. A number of UK digital businesses have faced difficulty over the years due to competition from businesses based outside the UK, not through providing a better service, but because of their ability to undercut UK businesses due to a lower rate of VAT. A tax at the point of consumption rather than at the point of supply is a sensible approach for digital businesses. It is to be welcomed that the Government are able finally to address that issue in the Bill, and I hope that the clauses will stand part of the Bill.

Clause 101 - VAT: refunds to health service bodies

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 101 will add Health Education England and the Health Research Authority to a scheme under the Value Added Tax Act 1994 through which VAT may be recovered. The scheme in the 1994 Act ensured that what would otherwise be irrecoverable VAT does not dissuade Government Departments and NHS bodies from contracting out activities if that would otherwise result in efficiencies of scale. The bodies that are the subject of clause 101 will replace two NHS bodies that are already entitled to recover VAT. The bodies have been established as non-departmental public bodies in the Care Act 2014.

Has the Minister made an assessment of VAT recovery arrangements for Government Departments and the economies of scale that are achieved? Such arrangements enable contracting-out activities. VAT recoverability often comes up with regard to other aspects of public sector work. I have debated VAT recoverability and university research with the Minister before, and I would be grateful for his comments about VAT recoverability and whether it is achieving the economies of scale that we would all like to see.

David Gauke (Conservative, South West Hertfordshire)

Clause 101 adds references to Health Education England and the Health Research Authority to section 41 of the Value Added Tax Act 1994. The clause provides continuity of VAT funding arrangements for those bodies now that the Care Act 2014 has received Royal Assent. Section 41(3) of the 1994 Act refunds VAT to Government Departments and a variety of NHS bodies named in section 41(7). These bodies include NHS trusts, health authorities, NHS England and clinical commissioning groups. The purpose of the provision is to ensure that what would otherwise be irrecoverable VAT does not dissuade Government Departments and NHS bodies from contracting out activities, if that would be more efficient. The clause makes consequential amendments that are necessary following the passing of the Care Act. It will add to section 41(7) the successor bodies to two health authorities: Health Education England and the Health Research Authority. The successor bodies have the same name, but a different legal status. The authorities are all included in section 41(7) but, as non-departmental public bodies, the successor bodies are not automatically included. Generally speaking, non-departmental public bodies are not included in section 41(7); instead, they are added individually on a case-by-case basis. The inclusion of the new Health Education England and the new Health Research Authority will ensure those bodies can recover the same levels of VAT as their predecessors, and it will ensure consistent treatment.

The hon. Lady raised the broader issue of VAT recoverability in the public sector. She referred to a previous occasion on which we debated it which, if my memory serves me correctly, was her debut as a shadow Treasury Minister. She had previously been a shadow Minister for higher education, so she was frighteningly well informed on that occasion, as she has been subsequently. All I can say at this point is that the Government fully support contracting out in the public sector when there is a good case for doing so on the grounds of efficiency. The Treasury is reviewing the provisions and expects to report at the autumn statement, so I do not think that there is much more I can say at this point. The clause makes one of several consequential changes to tax legislation that reflect reforms to the NHS and provide continuity of VAT treatment to certain NHS bodies, and I hope that it will stand part of the Bill.

Clause 102 - VAT: prompt payment discounts

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 102 changes an interpretation of EU VAT rules on prompt payment discounts that HMRC and its predecessor have adopted since the inception of those rules. A prompt payment discount is exactly as it sounds: it is a discount given by a supplier for prompt payment, normally within 30 days. HMRC’s current interpretation of the UK legislation allows suppliers to account for VAT on the discounted price even if prompt payment is not made and no discount is given. For example, if a customer buys goods that are priced at £1,000 and is told that if they pay within 30 days they will get a discount of 2.5% and pay £975, the supplier can subsequently account for VAT on £975 even if the prompt payment discount was not used and the customer paid £1,000.

After the change has been made, HMRC will require VAT to be accounted for on the amount that was actually received, to bring the system into line with EU legislation. HMRC has suggested that legal developments have forced it to change its view about the requirements of the European legislation. I have not been able to tell whether the change is motivated by tax losses arising from the current interpretation of the rules. According to the tax information and impact note, the measure is not expected to have an Exchequer impact. I would be grateful if the Minister could explain the thinking behind the change and why it was felt necessary to change the treatment of existing prompt payment discount rules.

The Chartered Institute of Taxation has expressed a concern that the change is being made in haste. The institute believes that no change in the treatment of the rules on prompt payment discounts should be made until the European Court of Justice rules that such treatment is not in accordance with EU VAT law. I would be grateful if the Minister would comment on the concerns raised by the CIOT and other stakeholders. That point goes back to the thinking behind why the Government chose to make this change now, rather than wait for case law to that effect.

The change being made is significant. The impact note states that up to 250,000 businesses may be affected, that the cost of the change will be about £8 million and that ongoing costs will be about £3.5 million per annum. Will the Minister tell us how the change will be publicised to affected businesses, and will he clarify when the proposed consultation will be carried out?

David Gauke (Conservative, South West Hertfordshire)

The clause amends VAT legislation relating to prompt payment discounts to protect revenue. This change removes any ambiguity in UK legislation and makes clear that VAT is to be accounted for on the full consideration actually received by businesses that offer prompt payment discounts. For most businesses, the change will come into effect from 1 April 2015. However, to prevent the risk of immediate, significant revenue loss, the clause provides that suppliers of telecommunication and broadcasting services, for which there is no requirement to provide a VAT invoice, are subject to the change from 1 May 2014.

Until now, HMRC has interpreted UK legislation as allowing businesses to account for VAT on the discounted price that they offer to their customers in return for prompt payment even in circumstances where that discount is not taken up. Historically, prompt payment discounts have been offered mainly on supplies made between businesses. Consequently, the recipients of such supplies have generally been able to reclaim any VAT charged to them. However, some large businesses are now seeking to offer prompt payment discounts to final consumers who are not able to recover the VAT charged to them. Under the existing interpretation of UK legislation, that results in a tax loss to the Exchequer because the supplier can account for VAT on the discounted amount even when the full amount is paid. In particular, HMRC has seen examples of prompt payment discounts being offered to consumers in the telecommunication and broadcasting sectors.

I turn to the hon. Lady’s question as to why this measure is being introduced now. As I set out, HMRC has seen businesses offering prompt payment discounts, which leads to under-collection of tax. The introduction of this measure now will protect an estimated £250 million a year in the telecommunication sector alone, bring UK policy and legislation clearly in line with EU law and prevent potential abuse of VAT prompt payment discount policy where businesses offer terms that few consumers can take up, which can result in an unfair competitive advantage for the supplier. I hope that that helps to explain why we wanted to move now and not wait any longer.

The clause will ensure that businesses pay less VAT only when their customers actually benefit from the discounts. It will also provide certainty for businesses that offer prompt payment discounts and align UK law clearly with EU law. For the majority of businesses, the measure will take effect from 1 April 2015, but for suppliers of telecommunication and broadcasting services, for which there is no obligation to issue a VAT invoice, the change came into effect on 1 May 2014. There is no obligation to provide a VAT invoice to unregistered people or businesses, so the measure will mainly affect supplies to final consumers. Should HMRC identify the risk of significant revenue loss in other sectors, the implementation of the measure may similarly be brought forward by secondary legislation.

As the hon. Lady said, about 250,000 businesses offer prompt payment discounts, and this measure will have an impact only on businesses that account for VAT on the discounted amount and their customers. HMRC estimates that if all those businesses have to implement the changes there will be a one-off total cost of £8 million; ongoing costs will be £3.5 million per annum. HMRC will issue a consultation document on how businesses that issue VAT invoices should invoice in circumstances where the offer of a prompt payment discount is made. The consultation will be published shortly, certainly by the end of this month.

The hon. Lady asked how the changes would be publicised. There was the Budget announcement, and the consultation will further publicise potential changes. HMRC will also monitor compliance and taxpayer awareness to ensure that the businesses affected are aware of the changes.

In conclusion, the clause ensures that businesses that offer prompt payment discounts will have to account for VAT on the consideration they actually receive, protecting UK revenue. It also ensures there is no ambiguity in UK prompt payment discount VAT legislation, and that it correctly reflects EU law.

Clause 103 - ATED: reduction in threshold from 1 april 2015

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss clause 104 stand part.

Shabana Mahmood (Labour, Birmingham, Ladywood)

With your permission, Mr Streeter, I would like to include clause 105 stand part in this group.

Gary Streeter (Conservative, South West Devon)

Proceed.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Thank you.

Clauses 103 and 104 extend the annual tax on enveloped dwellings, known as ATED. From 1 April 2015 properties held in corporate structures worth more than £1 million and up to £2 million will be subject to a charge of £7,000 per year. From April the following year the tax will be extended further and properties worth more than £500,000 and up to £1 million will be subject to a charge of £3,500 per year.

Clause 105 reduces the threshold at which non-natural persons, usually a company or partnerships with a corporate member or an investment scheme, have to start paying 15% stamp duty land tax from £2 million to £500,000.

To provide some background, ATED was introduced in the Finance Act 2013 and came into effect on 1 April that year. It is paid by companies or partnerships with corporate and collective investment schemes that own interests in UK residential property valued at more than £2 million.

Most residential properties are owned directly by individuals, but in some cases they may be owned by a company, a partnership with a corporate member or another collective investment vehicle. In those circumstances the dwelling is said to be enveloped because the ownership sits within a corporate wrapper or envelope. ATED is an annual tax and is charged in respect of chargeable periods running from 1 April to 31 March. The amount of tax charged is based on the value of the property on 1 April 2012. The property is revalued on 1 April every five years.

The Chancellor announced the reduction in the ATED threshold from £2 million to £500,000, which will be introduced over two years. In future years the charges will be indexed in line with the previous September’s consumer prices index. Several reliefs are available that might result in exemption from ATED. An ATED return has to be sent to HMRC in order to claim the relief. There are several ways in which ATED relief may apply to a dwelling, including when it is let to a third party on a commercial basis and is not at any time occupied or available for occupation by anyone connected to the owner; or when it is open to the public for at least 28 days per year. If part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will therefore apply to the whole property.

The background to clause 105 is that schedule 4A to the Finance Act 2003 provides for a higher rate SDLT charge of 15% for acquisitions of a higher threshold interest by a non-natural person. A higher threshold interest is an interest in a single dwelling of more than £2 million or one of a number of interests in a single dwelling acquired in linked transactions where the aggregate charge exceeds £2 million.

Clause 105 will amend the 2003 Act to reduce the threshold to £500,000. There are some exclusions from the higher rate, namely acquisitions by trustees for the purposes of letting, trading or redevelopment; trades involving a dwelling being made available to the public; and providing dwellings for occupation by certain employees or for use as a farmhouse. The measures are expected to raise £365 million over the next five years, and it has been estimated that approximately 12,000 individuals will be indirectly affected through their interests in NNPs that purchase UK residential property, such as companies and collective investment schemes.

The Institute of Chartered Accountants in England and Wales has raised some concerns about the treatment of NNPs envisaged in the clause. It states that many more NNPs will now be brought within the scope of ATED, but that many will also qualify for an exemption. Such companies will have to file a return in order to claim the relief, which the ICAEW fears will be a significant compliance burden. It cites the example of landlords, who often use a company to own commercially let residential property and who will be exempt from the charge but will still but will still have to report annually. Will the Minister comment on those concerns and on what efforts are being made to ensure that the burden is minimised and that all NNPs, particularly such landlords, will be made aware of how to comply with the new rules?

The measures include no graduation in charges, about which the ICAEW is particularly concerned. A property worth £500,000 incurs no charge while a property worth £500,001 will incur a charge of £3,500. Has the Minister received any representations about graduating the sums that apply to properties of different values? Why did he decide to go with the current ATED system within HMRC?

There are also no transitional provisions to allow a company to de-envelope a property without incurring excessive tax charges. Many stakeholders are concerned about the lack of transitional provisions, and it would be helpful to learn whether the Minister considered such provisions and why he decided not to go ahead with them.

Charlie Elphicke (Conservative, Dover)

Does the hon. Lady accept that this anti-avoidance measure is the right thing to do? Does the Labour party accept the measure’s principle and that this manner of organising matters is right?

Shabana Mahmood (Labour, Birmingham, Ladywood)

The hon. Gentleman will be aware that we supported the ATED changes that were introduced in the previous Finance Act and will support today’s measures. The measures relate to envelope dwellings, and we have a separate policy on residential property—our support for a mansion tax, which we would use to fund the reintroduction of the 10p rate, which we have discussed at length previously in Committee. I fear that I would get into trouble if I went beyond the scope of the clauses in this group.

Charlie Elphicke (Conservative, Dover)

Let us say that a form of tax, such as a stamp duty similar to the measure currently under discussion, was introduced for properties worth more than £2 million. How many such properties are there in the UK?

Shabana Mahmood (Labour, Birmingham, Ladywood)

I fear that the hon. Gentleman is trying to draw me into a much wider discussion about property taxation, which takes us beyond envelope dwellings and properties owned through corporate structures of the type that we are discussing. I am happy to have a separate debate with him at another time about residential property taxation, but he is asking me to go beyond the subject matter of the clauses.

On the valuation of property, the ICAEW expects more people to be dependent on the pre-return banding check, as the owners of lower-value properties will not want to pay for a Royal Institution of Chartered Surveyors valuation. It says that that means that HMRC will need to additional resources for those valuations and for compliance. When the Minister responds, will he explain whether those additional resources are available and how much the cost will be? In addition, the impact note states:

“Processing additional ATED returns will require IT systems changes and additional staff resource.”

As earlier, I would like further details about the amount of additional resources that will be needed for both the cost of IT systems changes and the additional staff—how big are staffing resources at the moment, and how much are they expected to increase by?

Charlie Elphicke (Conservative, Dover)

I wish briefly to make the point that I campaigned for this anti-avoidance measure for a long time before it was brought forward. Further, it is really a measure for people who are not resident in the UK. Enveloped properties are owned in a corporate vehicle that does not pay any capital gains tax on sale, and the company will typically be located somewhere such as the Channel Islands.

The measures the Government have already introduced are right, as are these changes. We have to stop the sort of systematic abuse of our tax system that we saw for too many years. In fact, I would go further: we should look at catching capital gains on UK land more closely and look further at that kind of avoidance. The avoidance of stamp tax and the issue of companies being sold overseas so that no receipt is made are wholly wrong, so these measures are absolutely right.

We need to be clear about the scale of the measures, however. It would not be right to think that they are an easy hit and will raise a lot of revenue. This is an anti-avoidance measure to deal with an abuse, not a measure that will raise vast quantities of revenue for the UK. I therefore say gently to the Opposition that when they talk about whether the measures should be extended to all properties with a value of over £2 million, they should bear in mind that only 55,000 residential properties in this country are worth over £2 million. The Opposition’s policy to raise £2 billion from the owners of those properties is ill thought out, and would mean an annual tax on such properties of £36,000. It is the tax policy and economics of the madhouse. It is undeliverable, ill thought out and absurd, and shows that the Labour party has learned nothing and forgotten nothing from its time in office.

David Gauke (Conservative, South West Hertfordshire)

Tempting though it is to renew our discussions on the Labour party’s proposals for a mansion tax, Mr Streeter, shall I turn to clauses 103, 104 and 105?

Gary Streeter (Conservative, South West Devon)

Why not?

David Gauke (Conservative, South West Hertfordshire)

Clauses 103 and 104 extend the annual tax on enveloped dwellings, or ATED, a charge paid by a company, a partnership with a corporate member or a collective investment scheme—for brevity, I will refer to those three entities as companies—that owns UK residential property valued at more than £2 million. Purchases of such property by those entities are subject to a higher-rate stamp duty land tax charge of 15%. Clause 105 reduces the starting threshold for the 15% charge from £2 million to £500,000.

Before I set out the detail of the clauses let me remind hon. Members why we introduced the annual tax on enveloped dwellings and the SDLT higher-rate charge in the first place. Some individuals choose to put the ownership of their homes within the wrapper of a company that they control, a practice often referred to as enveloping. Once the property is enveloped, it can effectively be sold by transferring the shares of that company. That transaction will not be subject to the normal rate of stamp duty land tax and is therefore a tax avoidance device.

The Government have made our position clear: this form of tax avoidance is not acceptable. We therefore introduced a package of measures to tackle this form of avoidance, to ensure that owners of enveloped residential properties pay their fair share of tax. The annual tax on enveloped dwellings was part of that package of measures. The other measures were the 15% rate of stamp duty land tax charged on enveloping a property and the extension of the capital gains tax regime charged on the disposal of the enveloped property. The annual tax on enveloped dwellings includes a number of reliefs aimed at legitimate commercial businesses—for example, property developers and traders, and property rental businesses—which can reduce the tax liability to zero. Similarly, acquisitions of residential property for legitimate business purposes are excluded from the SDLT higher-rate charge.

Clauses 103, 104 and 105 extend the scope of ATED and the SDLT higher-rate charge further to discourage people from using such avoidance devices. Furthermore, the extensions will discourage the use of corporate envelopes to invest in UK housing that is then left empty or underused. The Government recognise that the structure of ATED can create administrative burdens for some legitimate businesses—for example, property developers and traders—so we will consult on simplifications to the administration of the regime to reduce the compliance burdens for that group.

Clause 103 reduces the existing £2 million valuation threshold for ATED to £1 million. From 1 April 2015, there will be an additional band for enveloped properties worth more than £1 million and up to £2 million, with an annual charge of £7,000. ATED is a self-assessed annual tax, and returns and payments are usually due by 30 April each year. The clause includes a transitional rule, so that those caught by the new £1 million to £2 million band will be required to file returns by 1 October 2015 and to make a payment by 31 October 2015, instead of the normal deadline of 30 April 2015. The extra time will help to smooth the administration of the tax following the extension, particularly in view of potential further changes to the administration of the regime as a result of the consultation over the summer.

Clause 104 introduces a further reduction in the valuation threshold to £500,000. From 1 April 2016, there will be an additional band for properties worth more than £500,000 and up to £1 million, with an annual charge of £3,500. HMRC estimates that a further 21,000 properties will be brought within the scope of the regime as a consequence of the extensions. Of those 21,000, HMRC estimates that 9,000 properties will meet the conditions to qualify for a relief from the tax. The additional ATED revenue is estimated to be £5 million in 2014-15, rising to £25 million in 2015-16 and £50 million in 2016-17.

Clause 105 reduces the threshold above which SDLT may be charged at the 15% rate from £2 million to £500,000. The 15% charge replaces the normal SDLT charge, which would otherwise apply at 4%, 5% or 7%, depending on the amount paid for property. The new £500,000 threshold applies where the effective date of the purchase—usually the date of completion—is on or after 20 March 2014. Transitional provisions will, in the majority of cases, preserve the existing £2 million threshold where contracts were entered into before 20 March 2014, but are completed on or after that date. Other aspects of the 15% charge—including the exclusions that apply where the purchase is undertaken for genuine commercial purposes, such as property letting, redevelopment or trading—are unchanged. We estimate that as a result of the change the number of transactions that attract the 15% SDLT charge will rise from about 80 to about 350 per year, and SDLT revenue will increase by £30 million in 2014-15, with that figure rising to £35 million in 2018-19.

Let me turn to some of the questions raised in the debate. First, there is the issue whether the extension of ATED increases the compliance burden—particularly on genuine businesses—and whether that will result in any difficulty complying with the regime. We recognise the potential for the structure of ATED to create administrative burdens for genuine property rental, trading and development companies. The Government have therefore committed to consult over the summer on possible simplifications to the regime to reduce compliance burdens for bona fide businesses. In fact, informal discussions have already taken place in advance of the formal consultation.

On the question whether HMRC’s IT system will be able to cope with the additional returns expected once the thresholds have been reduced, and on the issue of resource for valuations, HMRC is exploring the possibility of securing a more robust online solution for ATED. It offers pre-return banding checks for ATED for valuation purposes, and those will be offered to new taxpayers who fall within 10% of each band.

On transitional measures, a chargeable period runs from 1 April to 31 March, and the normal date for filing an ATED return and making payment is 30 April in the chargeable period. Extra time has been given in the first year to help to smooth the administration of the tax following these changes, bearing in mind the potential for further changes as a result of the consultations that will take place over the summer.

All I will say on SDLT threshold rates is that the Government do not normally pre-announce them, for the very good reason that that would increase the risk of forestalling. There is nothing further I want to say about that.

Let me conclude by saying that the extension will further counter schemes that use corporate structures to avoid tax, and it will ensure that those who own UK residential property in this way pay their fair share of tax. I hope that the clauses can stand part of the Bill.

Clause 106 - SDLT: charities relief

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss schedule 19.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Clause 106 is being introduced as a result of a Court of Appeal judgment handed down on 26 June 2013 in the case of the Pollen Estate Trustee Company Ltd and King’s college London v. HMRC. The substance of that judgment was that when a charity purchases property jointly with a non-charity purchaser, relief from SDLT under paragraph 1 of schedule 8 to the Finance Act 2003 is available on the charity’s share of the property. Relief is subject to a test, based on the extent to which the charity’s share is used for charitable purposes.

In the light of that judgment, HMRC has invited claims for any overpaid SDLT from charities that purchased property jointly with a non-charity purchaser and that satisfied the relevant conditions, but did not claim the relief. Relief is limited to circumstances where the charity used the greater part of its share of the property for a charitable purpose. Where HMRC has opened an inquiry into the relevant land transaction return, it has been in touch with the charities concerned.

We are told that the measure is expected to have a negligible impact on the Exchequer, and the impact note estimates that fewer than 100 charities a year will be affected by the change and that the compliance costs to the charities are expected to be minimal. I would be grateful if the Minister could confirm that. Also, can he tell us how many charities since the Court of Appeal judgment have claimed the overpayment of stamp duty land tax, the value of those claims and whether he is confident that there has been no exploitation of the relief available for the avoidance of SDLT?

David Gauke (Conservative, South West Hertfordshire)

Clause 106 and schedule 19 make it clear that partial relief from stamp duty land tax is available where a charity purchases property jointly, as tenants in common, with a non-charity purchaser. The change is being made in response to a Court of Appeal judgment, as the hon. Lady rightly pointed out. The Court ruled that where a charity purchases property jointly with a non-charity purchaser, the charity could claim relief on its share of the property. Without the change, it would not have been clear from the legislation that partial relief is available. The legislation will provide certainty for taxpayers about the availability of relief and the amount of relief that the charity can claim. The change will also ensure that the availability of partial relief cannot be exploited for avoidance purposes.

The change made by clause 106 and schedule 19 will make it clear on the face of the legislation that partial relief is available. The relief will apply where a charity purchases UK land or property jointly, as tenants in common, with the non-charity purchaser. The amount of relief that the charity can claim will be based on the percentage that share the charity holds in the property or the percentage of the purchase price paid by the charity for its share in the property, whichever is lower. We estimate that as a result of the change, fewer than 100 charities a year will be able to claim partial relief from SDLT where relief would not have been available previously. The change is expected to have a negligible Exchequer impact.

On the question of how many have claimed the value, given the context I have just set out, it is not likely to be a significant number, but I am happy to write to the hon. Lady with an answer to her questions on that issue. As for whether there has been exploitation before now, we are not aware of any exploitation of the relief as a result of the judgment, but obviously we would want to address the potential for that at the earliest opportunity.

To conclude, this measure provides certainty for taxpayers on the availability of partial relief and the amount of relief that can be claimed. I therefore commend the clause and schedule to the Committee.

Clause 107 - Abolition of SDRT on certain dealings in collective investment schemes

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 26, in clause 107, page 90, line 33, at end insert—

‘(5A) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons a report setting out the impact of changes made to Schedule 19 of the Finance Act 1999 by this section.

(5B) The report referred to in subsection (5A) must in particular consider—

(a) the impact on tax revenues;

(b) the expected beneficiaries; and

(c) a distributional analysis of the beneficiaries.”

Gary Streeter (Conservative, South West Devon)

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

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to be here, Mr Streeter. We are making good progress, and I am sure that we will continue to do so. However, this is an important amendment to an important clause, so I want to make a few points, as well as posing some questions to the Minister.

The clause removes part 2 of schedule 19 to the Finance Act 1999, abolishing the stamp duty reserve tax currently payable by fund managers when investors surrender units in unit trusts or shares in open-ended investment companies. Our amendment essentially asks the Treasury to publish the costs to the Exchequer in order to ensure that a list of beneficiaries and a distributional analysis for the abolition of stamp duty reserve tax is put into the public domain. In a sense, the amendment is not dissimilar to some of our previous amendments that asked for further information and a report within six months of Royal Assent, but it specifically focuses on the key points that I have raised. The clause removes the stamp duty reserve tax charge for which fund managers are liable when investors sell or surrender their units in UK unit trust schemes or shares in UK open-ended investment companies. Those changes were first announced by the Chancellor in the 2013 Budget.

The Government say that their intention is to boost investment in the UK asset management industry by abolishing part II of schedule 19 to the Finance Act 1999, which has been cited by some in the industry as an obstacle to establishing funds in the UK. The schedule applies a special stamp duty reserve tax to collective investment schemes, such as unit trusts or open-ended investment companies, when investors sell their units and those units are reissued to new investors within a two-week period. The change will not affect investors directly, but fund managers will no longer have to account for, and pay, the special stamp duty reserve tax charge that is currently levied at a rate of 0.5%.

We have concerns about what the explanatory note says about how the cost will ultimately be borne, because the proposal is that the reduced transaction costs of surrendering UK collective investments should make them more attractive to investors. Of course, the move has largely been welcomed by industry bodies; indeed, a number of them have been campaigning for the measure for some time. The legislation makes other amendments, too. Our concern, however, is that this could become a tax cut for those who are already wealthy. The purpose of our amendment is partly to try to ensure that we get information about exactly who will benefit from the measure, which is why we have asked for specific information about tax revenues, the beneficiaries and the distributional impact of the clause.

James Duddridge (Conservative, Rochford and Southend East)

Is the hon. Lady arguing that there should be a differential in the tax treatment of closed-ended unit trusts and open-ended unit trusts? If so, why? I fail to see the argument for a differential.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am trying to get to the Government’s thinking, and hopefully the Minister will be able to address some of my points. We opposed the change when it was announced in Budget 2013. The Government’s tax information and impact note shows the cost to the Exchequer and states:

“The measure is likely to have a positive effect on investments and employment.”

The note does not seem to provide supporting estimates to back up those claims, so I would be interested to hear whether the Minister has any further information. The note goes on to acknowledge that the change directly affects only a relatively small number of individuals and bodies: 100 fund managers and 2,500 funds. Again, we assume the people affected to be wealthy because we have no information to the contrary. Other than possible benefits to pension investments, I am trying to understand how the measure will affect individuals and households. The note states that the change is only “likely” to create additional employment.

I have some questions for the Minister. People are struggling with the cost of living and problems associated with their day-to-day experiences. People have household costs, and they are trying to get into employment. They are trying to ensure that they have a basic standard of living. Those on the lowest and middle incomes have been hit by consecutive years of wage stagnation, cuts to tax credits, VAT rises and the bedroom tax, and so on. It is difficult for people to understand why the Government essentially seem to be giving a hefty tax break to the wealthiest people.

Iain McKenzie (Labour, Inverclyde)

My hon. Friend makes a strong point. On the whole, this looks like the Government giving away a tax cut to their friends in the City, while they turn their back and refuse to accept that there is a cost of living crisis up and down the country.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes an interesting point and I know, because his constituency is not all that far from mine in the west of Scotland, the impact there of many of the Government’s policies. He asks exactly the kind of question that his own constituents will ask him, and he always makes a very powerful point on their behalf.

The Minister would, of course, be welcome within the confines of what we are discussing to make any comment he liked on how he will try to assist our constituents to deal with the cost of living crisis, although I suspect, Mr Streeter, that you might want to put some boundaries around that, so I will not stray too far. The Investment Management Association, whose members manage a total of £4.5 trillion in assets in the UK, stated:

“UK assets under management and funds under management are at record levels, and the UK retains its position as the second largest asset management centre in the world after the US.”

Of course, we recognise the value to the economy of that particular industry, and we want to see people continuing to be based in the UK. However, I think that prompts the question of why the Government are intent on giving that industry such a big tax break when, by the industry’s own assessment, it seems to be doing very well.

Will the Minister give us any further information on the whole question of how this will have a positive impact on the UK jobs market in particular and the UK economy more widely? Last year, the then Financial Secretary to the Treasury stated:

“What are the advantages of having funds domiciled in the UK? First, there are advantages in terms of jobs, particularly in the regional economy. While fund managers can operate from anywhere, most jobs in fund management come from ancillary services and the professional services associated with them. These are high-value jobs in IT, legal services and accountancy support, and they are typically in the jurisdictions in which the funds are domiciled.”—[Official Report, 2 July 2013; Vol. 565, c. 871.]

On the basis of that information, will the Minister provide us with a concrete number or an estimate of the jobs he expects to be created as a result of this particular move? Will he be more specific about the regional benefits that were previously referenced?

Given the amount that the tax information and impact note talks of in relation to the changes, their impact on the Exchequer is not inconsiderable. That is why it is important to understand the impact and the potential benefits, and to try somehow to marry those up to see if there is indeed a benefit. According to the Government’s figures, HMRC potentially loses out on an estimated £160 million a year over the next three years, £165 million in 2017-18 and £170 million in 2018-19. That is not an inconsiderable sum of money and I wonder if the Minister feels able to justify the loss of that revenue to the Exchequer. If he gives us the figures for the jobs and for the wider economy, we will of course listen to that. It does, however, seem a significant loss to the Exchequer over the next five years, and he would surely agree that this money would perhaps be better spent elsewhere, such as on creating jobs for young people, and on improving support for those people on the lowest and the middle incomes that my hon. Friend the Member for Inverclyde and other Opposition Members are particularly concerned about. I will be interested to hear the Minister’s response.

We will press our amendment, unless the Minister makes revelations that I have not anticipated, because it is important that we get those figures into the public domain. The Minister has on many occasions gently and politely knocked back my efforts to get such reports on other issues. Perhaps on this occasion he will make my day and accept our amendment—[Interruption.] I doubt it, going by the look on his face.

Chris Williamson (Labour, Derby North)

It is a pleasure to serve under your chairmanship this afternoon, Mr Streeter. I rise to speak in support of the shadow Minister, my hon. Friend the Member for Kilmarnock and Loudoun. This is an eminently sensible amendment, and the general public are entitled to see it passed this afternoon.

People are pretty cynical about the coalition Government. We have already seen examples of their looking after their mates in the City, such as the mates rates when the Royal Mail was flogged off—

Charlie Elphicke (Conservative, Dover)

Back to the 1970s.

Gary Streeter (Conservative, South West Devon)

Order.

Chris Williamson (Labour, Derby North)

Government Members can disabuse me, but we still do not know who the huge beneficiaries were—it is a secret. The public have a right to know who will benefit from the latest mates rates proposition in this clause.

Sheila Gilmore (Labour, Edinburgh East)

I wonder whether my hon. Friend thinks, like me, that the comments from a sedentary position, such as “back to the 1970s”, are particularly revealing. Actually, inequality was lower in the 1970s than in the whole of the post-war period. Clearly, Government Members do not like that period.

Chris Williamson (Labour, Derby North)

My hon. Friend is absolutely right. In the 1970s, earned income as a proportion of the national cake was significantly greater than it is today. Ever since the dreadful day in 1979 when Margaret Thatcher came to power and heralded the neo-liberal agenda, workers’ earnings as a proportion of national income have diminished, while unearned income has risen exponentially.

Gary Streeter (Conservative, South West Devon)

Order. Before we continue with the history lesson, can we look at amendment 26, which does not refer to the 1970s? It is important that this good-natured debate continues strictly within the confines of the rules of the House. We are considering clause 107 and amendment 26.

Chris Williamson (Labour, Derby North)

I am grateful for that guidance, Mr Streeter.

Sheila Gilmore (Labour, Edinburgh East)

I hope that, like me, my hon. Friend does not find it remotely funny to be talking about a period when for 10 years out of 16 more than 3 million people were unemployed.

Chris Williamson (Labour, Derby North)

My hon. Friend is absolutely right. I would sooner take us back to the 1970s than the 1870s, which is the direction of travel in which the Government want us to go with the workhouse mentality they are trying to inflict on the nation—[ Interruption. ]

Gary Streeter (Conservative, South West Devon)

Order. I want to hear whether the hon. Gentleman is in order.

Chris Williamson (Labour, Derby North)

I can tell that Government Members really cannot care less about the cost of living crisis that is affecting millions of people in our country; they are more interested in looking after their friends in the City. It is clear from Government Members’ guffaws and laughter that they have taken great pleasure in inflicting austerity on our country over the past four and a bit years. We have seen the impact of their decimation of our public services, from reduced social care to longer waiting lists. Yet with this proposition the Government are seeking to give a tax cut to an industry that is not struggling but doing incredibly well. According to the latest figures that I have seen, the industry is responsible for some £5.4 trillion-worth of funds, so it is hardly in need of any assistance. I am sure that Government Members would say that they want to make the UK more attractive to investment funds, but this is yet another example of a race to the bottom. Frankly, I do not think that we want to be in competition with the likes of Luxembourg and Ireland on tax rates.

It is important to bear this in mind: who is benefiting? We often hear Government Members say, “We’ve turned the corner. The economy is recovering. We have economic growth.” But who is benefiting from that? By and large the top 1% are benefiting, but the bottom 90% have seen a diminution of their income, after tax is taken into account.

Iain McKenzie (Labour, Inverclyde)

That may be why the Government are so reluctant to put this report in front of the House. They know that the numbers who benefit from this will be very limited indeed.

Chris Williamson (Labour, Derby North)

Absolutely right. It may also be revealing to note that many of the people who will benefit are benefactors of and donors to the Conservative party. We can only speculate about that, of course, because it is a secret. However, it is important that we have this matter on the record and that the general public know who will benefit from the measure.

The cost to the taxpayer of the clause over the next five years—my hon. Friend the Member for Kilmarnock and Loudoun made the point—is going to be the best part of £1 billion, with some £800 million of tax revenue lost to the Exchequer, at a time when 27 million workers in our country have seen their incomes after tax diminishing, even though we are in a state of economic growth at the moment. Would it not be better to use that money to generate jobs and support our public services? Looking at the figures, what could this money be used for? It is about choices, is it not? We know about the choices that Conservative and Liberal Democrat Members want to make; they want to look after the wealthiest and most powerful people in our country—their mates in the City, as I have already said.

Let us make some comparisons. I was doing a quick calculation as my hon. Friend was speaking, about where that money, which is going to be lost to the Exchequer, could be used to much better effect. It would fund some 7,000 additional nurses, on the starting salary, bearing in mind that waiting lists are growing in our NHS at the moment; some 7,000 teachers could be appointed on the starting salary, if this tax cut did not go ahead; and around 8,000 social workers could be employed. That would be possible in each of the five years that we will be losing this money, and into the future.

Perhaps we could use the money for capital investment. For example, it would fund some 10,500 council houses. We have a massive housing crisis in our country, but we are still building fewer houses than we have ever built since the 1920s. Would it not be better to use this money to build houses and generate jobs, rather than giving tax cuts to already wealthy and powerful people in the City of London?

Heather Wheeler (Conservative, South Derbyshire)

In the hon. Gentleman’s peroration about building council homes, will he congratulate the Conservative-run South Derbyshire district council, which is building council houses, even though it has had to cope with the reconfiguration of finance from this Government?

Chris Williamson (Labour, Derby North)

I am delighted that South Derbyshire is building council houses. Indeed, if we look around the country at the number of council houses being constructed, Labour authorities are building far more than Conservative authorities. I welcome new houses wherever they are, whether they are built by Conservative-controlled South Derbyshire district council or Labour-controlled Derby city council. The fact is we need a lot more than the ones being built in Derby and South Derbyshire at the moment. We need hundreds of thousands of new homes.

In conclusion—

Ian Swales (Liberal Democrat, Redcar)

The hon. Gentleman is making an interesting speech. He seems to be assuming that the entire amount of money involved will end up in the hands of the managers of the various investment companies and unit trusts. As the background note makes absolutely clear, the money will end up in the companies and in the trusts ultimately to the benefit of investors, which can include some of the workers he is talking about.

Chris Williamson (Labour, Derby North)

With the greatest respect to the hon. Gentleman, that is a fairly naive intervention. We have seen huge bonuses being paid out to our friends in the City, totally irrespective of the state of the economy and the fact that people are really struggling outside the City and living through a cost of living crisis. If the hon. Gentleman thinks that the money will not filter through to the fund managers, he is sorely mistaken.

In conclusion, unless Government Members agree the amendment tabled by my hon. Friend the Member for Kilmarnock and Loudoun, it will be yet another indication that the Government are entirely out of touch, completely out of date, and, in 330 days from today, they will be out of office.

David Gauke (Conservative, South West Hertfordshire)

Let me turn to the clause, at least to begin with. The Government announced in Budget 2013 that they would abolish the schedule 19 charge as part of their investment management strategy to improve the UK’s competitiveness as a domicile for collective investment schemes. HMRC published draft legislation in December 2013 for consultation, which ended on 4 February 2014. As a result, a minor change was made to the final clause included in the Bill.

Schedule 19 is a special stamp duty reserve tax charge levied on UK collective investment schemes, or “funds”. A charge arises when investors surrender back to the fund manager either their units in UK unit trust schemes or shares in UK open-ended investment companies. It is paid by fund managers, but the cost is ultimately borne by the investors in the schemes—a point made by my hon. Friend the Member for Redcar. The investors are largely pension schemes, life companies and individual savers. It is worth stressing that the charge is only payable by UK schemes. An identical scheme established outside the UK would not be subject to the charge, placing the UK at a competitive disadvantage as a domicile for collective investment schemes. Investors who do not wish to pay schedule 19 charges already have the option of investing in funds domiciled offshore.

The schedule 19 regime is regarded as complex and burdensome, requiring frequent tax calculations and returns to be sent to HMRC. Additionally, because of the way in which the tax operates, its headline rate implies a much greater tax burden than the annual cost actually suffered. This is difficult to explain to investors and gives rise to presentational complications when trying to market UK funds, especially overseas. It is for those reasons that schedule 19 was identified as a major deterrent to domiciling funds in the UK, with a particularly damaging effect on the ability of UK funds to attract non-UK investors.

The clause repeals part 2 of schedule 19 to the Finance Act 1999, thereby abolishing the schedule 19 charge. This levels the playing field between the UK and other countries as domiciles for collective investment schemes. The abolition has effect from 30 March 2014. The clause makes various consequential amendments and, in a minor change from the draft provisions published in December, it also makes a small change to how the main or principal stamp duty reserve tax charge applies to certain rare transactions.

The transactions concerned are where investors surrender their units in a fund for assets of the fund, rather than for cash, which is known as an in specie redemption. The securities transferred to the investor are usually in proportion to the assets held in the fund. Where that is the case, there is no SDRT charge. If the securities transferred are not in proportion to the assets held in the fund, that is known as a non-pro rata in specie redemption and would previously have been taxable under the schedule 19 regime. The abolition of schedule 19 means that these types of transactions would have become free from tax. The principal charge is therefore being amended to apply to these rare transactions instead of the schedule 19 charge.

Amendment 26, which Opposition Members tabled, asks the Government to lay a report before Parliament within six months of the Bill’s receiving Royal Assent that sets out the clause’s impact on tax revenues and who benefits from it. The Government are not minded to accept the amendment. While the Government rightly keep all tax policy under review, there would be little merit in producing a report in the way suggested by the amendment. We have already had the impact of the measure independently assessed by the Government Actuary’s Department. It calculated that a typical 22-year-old, currently earning average weekly earnings and investing the equivalent of 10% of gross income each year over a 45-year period, would see a fund value that was £11,200 greater at retirement as a result of these changes. That is approximately equivalent to a 1.3% uplift in their total fund at retirement. In current money terms, that is equivalent to an additional £4,600. Further detail on the distributional impact of the measure was included in a tax information and impact note for the measure in December, alongside the draft legislation.

On the benefits seen due to the improved competitiveness of the UK as a fund domicile location, the time taken to authorise and launch new funds means that any positive effects of the change would not have been established by the time of such a report, which would be premature.

I want to stress again, because this point has been consistently missed by Opposition Members, that the schedule 19 charge is borne by investors, not by fund managers. Data from the Investment Management Association suggest that around 85% of the charge is borne by pension and insurance companies together with retail and public sector investors. Abolishing schedule 19 is not a tax cut for hedge fund managers or hedge funds, which have in fact never paid tax under the schedule 19 charge.

I make reference to hedge funds not because the hon. Member for Kilmarnock and Loudoun referred to them—in fact, it was noticeable that neither she nor the hon. Member for Derby North, who usually likes to bring them into most subjects, mentioned hedge funds in their remarks—but because fairly consistently and until recently, the Opposition characterised the measure as a tax cut for hedge funds. The Leader of the Opposition, in Prime Minister’s Question Time no less, accused us of introducing a tax cut for hedge funds. The shadow Chief Secretary has certainly referred to it as a tax cut for hedge funds on many occasions. I take it from the remarks of the hon. Member for Kilmarnock and Loudoun that that is no longer the Opposition’s position, and I am glad. They have finally understood what schedule 19 is and they no longer make accusations that the measure is a tax cut for hedge funds. I will give the hon. Lady an opportunity to withdraw formally that accusation, which her party has made repeatedly.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am not going to withdraw anything that has been said previously, which will not surprise the Minister. I wonder whether he can explain why the impact note specifically states:

“This measure directly affects managers of collective investment schemes.”

It goes on to say:

“This measure removes a charge”

and

“Schemes that are affected will pay less tax”—

that seems fairly straightforward to members of the public. It also states that the measure “could” improve returns on investments, and I am not sure where he found the 22-year old that he was talking about in his example.

David Gauke (Conservative, South West Hertfordshire)

The 22-year old was found by the Government Actuary’s Department, rather than by me. There is an important point to make—it would be helpful to the Opposition if they grasped it—about tax incidence and the distinction between who writes the cheque and who bears the tax. It may well be the case that the funds write the cheque—the funds pay the money over—but the tax is borne by the investors. Those are principally pension funds, and underlying that are the policyholders in a pension fund. That point should not be missed.

Another point, which we fully acknowledge, is that if we want to help our investment management industry, an uncompetitive charge that puts UK-domiciled funds at a disadvantage to funds domiciled elsewhere is clearly damaging to the investment management industry. The industry is important to the UK economy. A strong investment management industry is good for the UK as a whole and all its citizens due to the jobs and taxes it generates. This is a critical time for the industry and it is important to make these changes now.

In July 2013, the alternative investment fund managers directive—the AIFMD—came into force. That may lead to an estimated €250 billion moving onshore in Europe and it gives the UK an opportunity to attract significant new funds. In addition, the industry is currently experiencing significant growth. Emerging economies are becoming increasingly wealthy and are able to save and invest significant amounts. EU funds are, in many ways, a natural home for those investments and the UK must lay the right foundations now before that new market is lost to our competitors. I could even go as far as saying that ensuring that we have a strong investment management industry is part of a long-term economic plan. The provisions ensure that we have in place the long-term conditions for a thriving industry, which benefits not only London and the south-east, but employs 1,400 people in the west midlands, 3,600 people in Scotland—some hon. Members who spoke in this debate might be interested in that—and 1,000 people in the north-west.

David Rutley (Conservative, Macclesfield)

My hon. Friend makes a very important point about the significance of investment management and financial services in the UK. The industry does indeed make a difference to the long-term economic plan, but would it not also help the UK economy in the global race?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend beats me in getting in yet another important phrase. He is absolutely right; this is the right change to ensure that the UK is an attractive place for funds to be domiciled. It is good for that industry, and it is good for the people who invest in a pension. I do not know whether that is the category of person whom the Opposition consider to be wealthy and therefore not worthy of any support, but a lot of people—increasingly, indeed, as a consequence of auto-enrolment—will be investing in pension schemes, and we should do everything we can to encourage and support that.

The Opposition’s approach to the measure appears to be hostile. That will do nothing for the pension schemes or the investment management industry, and some of the rhetoric we have heard about a return to the 1970s does absolutely nothing for economic confidence in this country, should there be any prospect of the Labour party returning to office.

Chris Williamson (Labour, Derby North)

In view of what the Minister says, what is his objection to the Labour amendment? All we seek is publication of who the beneficiaries are. Surely that is not unreasonable. Do the British people not have a right to know? What is there to fear?

David Gauke (Conservative, South West Hertfordshire)

I addressed that point earlier. We have set out, in the tax information and impact note, the impacts of the abolition of schedule 19. There is no reason for a more detailed analysis for that measure. It would be disproportionate, and it is difficult to see what such analysis would achieve, particularly given that it would take longer than six months for evidence to become available of how the benefits of the change were accruing to investors.

I will not accept the amendment and I urge the hon. Member for Kilmarnock and Loudoun to withdraw it. I want to highlight the fact that the clause will help the many, not just the few, and will strengthen an industry that is important to us.

Charlie Elphicke (Conservative, Dover)

Never mind the amendment; I want to pick up on the Opposition’s tone. If we are to support hard-working people and their families, we need to ensure that there are jobs. This measure is about creating jobs. We have heard from the same old Labour party, which is obsessed with the rich and the poor, rather than with just creating jobs and prosperity for the country, so that people can get on, work hard and do well.

David Gauke (Conservative, South West Hertfordshire)

I entirely agree. There are moments during our debates when the mask slips from some Opposition Back Benchers, at least.

Chris Williamson (Labour, Derby North)

Will the Minister give way?

David Gauke (Conservative, South West Hertfordshire)

I am delighted to provide a further opportunity for the mask to be cast off altogether.

Chris Williamson (Labour, Derby North)

We just heard an intervention arguing that the provision is about job creation. I gave a list of the jobs that could be created if the money were directed in a different way. How many jobs will be created, and in what sectors, as a result of the measure that the Minister is putting forward?

David Gauke (Conservative, South West Hertfordshire)

The sectors are likely to be the investment management sector. What do we mean by that? It is not only those who are directly employed; this also relates to operations and administration, IT, compliance, and legal and audit services. All those will benefit. It seems to me that the hon. Gentleman’s only answer on job creation is more public sector employment. That is what he proposed and that is his position—one that I think he is consistent about. However, we must recognise that putting in place the conditions for private sector job creation matters.

Chris Williamson (Labour, Derby North)

It is not working.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman says it is not working, but there are more people in work today than ever before. The biggest risk to that is the anti-business policies of the Labour party.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I shall not detain hon. Members too long before we vote; I intend to press the amendment. If it is not carried—and no doubt it will not be, given the Minister’s comments—I want to vote against the clause. We have not heard a response from the Minister to the issues that we wanted to draw out: the number of jobs, the expected beneficiaries and the distributional analysis that the amendment calls for.

I am glad that we livened up the debate, because these are important matters. My hon. Friends are speaking out on behalf of their constituents when they express concern about the impact of Government policies, and about the jobs question. Unfortunately, it is sometimes too easy for those on the Government side to resort to saying that there are more people in employment than ever before, when we know that the reality for many of our constituents is that they are working in jobs in which they are not able to gain full-time hours. In many instances, they are working in jobs that ultimately are not the jobs for which they have been trained. They are perhaps taking those jobs rather than having no job at all. There are a number of young people in particular—

Ian Mearns (Labour, Gateshead)

Will my hon. Friend give way?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will in a moment. I was interested in the notion of the 22-year-old, because the majority of 22-year-olds who have come to me are desperate to get a job, either because they have finished an apprenticeship and are not being kept on, because companies cannot keep them on, or because they have recently graduated and are determined—desperate—to get their foot on the employment ladder. Unfortunately, the notion that their first decision would be about where to put that investment for the long term does not apply to the majority of the 22-year-olds in my constituency. I am sure that it is little comfort to my hon. Friend the Member for Derby North either that most of the jobs will be created in the investment management sector, rather than in the manufacturing sector and the other areas on which many of our communities depend.

Ian Mearns (Labour, Gateshead)

My hon. Friend has almost pre-empted my question. I was just wondering whether she would speculate on how soon we can expect to see advertisements, and how many there will be, for investment management job opportunities at the jobcentre in Gateshead.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am sure my hon. Friend will tell me when the adverts do appear, because I cannot speculate on when that will happen.

I have said that I intend to press the amendment to a vote. I suspect that nothing that I say at this point will change the Minister’s mind. Therefore, I will leave it at that in order that we can make further progress.

Clause 108 - Abolition of stamp duty and SDRT: securities on recognised growth markets

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss schedule 20.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hope that we will be fairly brief on this clause, which introduces schedule 20. It will relieve from stamp duty and stamp duty reserve tax—collectively, stamp tax on shares—trades made on recognised growth markets such as the alternative investment market and the ICAP securities and derivatives exchange. The Government’s stated intention is to boost investor participation in equity growth markets and improve conditions for growing companies raising equity financing.

At present, transfers of shares and securities of UK-registered companies generally attract stamp duty charges at the rate of 0.5%. Stamp duty is charged if the transfer is enacted by execution of a written statement, and SDRT applies to transfers when no written instrument has been executed. The clause means that, as of April this year, buyers of shares traded on recognised growth markets such as AIM and ISDX will no longer have to pay the 0.5% tax.

When the Chancellor announced the measure in the 2013 Budget, he said it was designed to ease access to funding for small and medium-sized businesses to help to reinvigorate the growth of SMEs and, therefore, the wider economy. According to schedule 20, markets will be regarded as recognised growth markets if the majority of the companies on the market have market capitalisations of less than £170 million or if the market’s rules of admission require companies to demonstrate at least 20% compounded annual growth in revenue or employment over the three financial years preceding admission. The new provisions ensure that transfers of shares and securities admitted to trading on markets specifically designed for smaller companies, or for companies that can demonstrate a sustained record of growth, will no longer attract the stamp duty tax charges.

The tax information and impact note estimates the cost that will accrue to the Exchequer as a result of the measure. The Government’s argument is that this is yet another measure to stimulate lending and ensure that money comes into SMEs. Let us hope that it does what it says on the tin, because some of the other measures that the Government have introduced—including the flagship so-called funding for lending scheme—have not been as successful as the Government suggested they would be. The latest figures from the Bank of England show that lending to SMEs declined by £700 million in the three months to April.

The Chancellor argues that clause 108 will incentivise investment that will benefit small businesses, but it is by no means guaranteed that small UK businesses will benefit. I hope that the Minister will respond to that point. I understand that an employee of the Wealth Management Group has raised concerns about the fact that

“not all of the benefit would flow to UK smaller companies starved of financing, which is part of the Government’s rationale…There are some larger businesses listed on exchanges such as AIM and around 40 per cent of AIM companies—representing half of its market cap—are either incorporated overseas or operate outside the UK.”

Ian Mearns (Labour, Gateshead)

My hon. Friend’s point about small and medium-sized enterprises needs to be emphasised. I have said in the Committee before—but it needs to be restated—that if we are going to get the economy in the north-east of England to grow and create jobs in the region, we must stimulate small and medium-sized enterprises. Of 136,000 companies registered in the north-east of England only 1,000 have more than 50 employees. We need to help SMEs.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend again makes an important point about the number of jobs. Perhaps the Minister will be able to inform us about that. As far as I can see, once again the tax information and impact note contains no information about the number of jobs the Government expect to be created by the changes. That seems to suggest that the tax cut in this context will have no impact on ordinary individuals and families. It would be helpful if the Minister picked up that point.

To return to the point I was making about AIM companies, when the change was first announced in Budget 2013, the top five companies listed in AIM included two oil exploratory companies focused on Africa, a low-cost African airline and a middle eastern oil exploratory company. Two of them had capitalisations well over the £170 million threshold and one had a capitalisation of £1.6 billion. We want to ensure that support is available for SMEs, particularly where jobs can be created in the short term and in areas where people are most squeezed by the cost of living crisis. It is important that whatever measures are put in place impact on those areas and those people.

Will the Minister comment on the points I have made? Can she also tell us what percentage of the companies listed on registered growth markets that will benefit from the change are incorporated and operated in the UK? Will she give us an estimate of the number of SMEs that she expects to benefit from this change? On the subject of jobs, what evidence does she have that this measure will succeed when other schemes have not created the number of jobs or growth equitably across the UK?

Andrea Leadsom (Conservative, South Northamptonshire)

Clause 108 makes changes to relief from stamp duty and stamp duty reserve tax on purchases of shares in UK companies quoted on recognised growth markets. The measure is designed to boost investor participation in equity growth markets and improve the financing conditions for smaller and growing UK companies.

Transaction taxes are widely considered to be a drag on economic growth. In particular, they increase firms’ cost of capital by depressing their share prices. At a time when financing for small and growing business is hard to come by, the Government want to help to ease the burden. That is why we are abolishing this tax for shares quoted on recognised growth markets. With this measure, we are improving the long-term financing conditions for the smaller and growing British businesses that use AIM, the ISDX growth market and other equity growth markets to raise the funds they need to help them to grow and create jobs.

The value of the UK companies on AIM and the ISDX growth market alone is almost £40 billion. Companies will feel the benefits of this measure via their share prices and every time they conduct equity fundraising. In combination with the Government’s move in August last year to allow AIM shares to be held in ISAs, this measure will attract more investors to equity growth markets, improving liquidity in those markets and the funding environment for more than 800 UK companies.

The clause establishes a recognition process under which stock exchanges meeting certain criteria related to the size or growth rates of companies on those markets may apply to be recognised growth markets. Purchasers of shares in companies quoted on one of those recognised growth markets no longer have to pay stamp duty or SDRT on those purchases, as long as those shares are not also listed on a main market. The relief came into effect on 28 April.

To conclude, long-term economic success depends on today’s small and high-growth companies being able to access affordable long-term financing to grow into the large businesses of tomorrow. With this measure, the Government are showing that they fully support them.

Clause 109 - Temporary statutory effect of House of Commons resolution

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The clause is a purely procedural one, which addresses the parliamentary machinery for introducing legislation and amends provisions relating to the House of Commons resolutions for stamp duty contained in the Finance Act 1973. Those resolutions, which can be used to vary or abolish stamp duty, have temporary statutory effect until replaced by an Act of Parliament. The clause ensures that, following the change to spring-to-spring Sessions, any resolutions for stamp duty will retain their practical effect and allow sufficient time for parliamentary scrutiny.

The change to spring-to-spring Sessions means that Parliament may be prorogued each year between the Budget, when a resolution might be passed, and the enactment of the Finance Bill. Section 50 of the Finance Act 1973, which contains the provisions relating to resolutions for stamp duty, will now be amended to ensure that such a resolution remains effective until it is replaced by an equivalent provision in the Finance Act. Similar issues in relation to resolutions for other taxes and duties covered by the Provisional Collection of Taxes Act 1968 were resolved by legislation introduced by the Finance Act 2011. We have no objection to the measure standing part of the Bill.

David Gauke (Conservative, South West Hertfordshire)

I thank the hon. Lady for her comments. She has explained the clause and its contents.

Clause 110 - Inheritance tax

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss schedule 21.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The clause does four things. First, the threshold for a zero rate of inheritance tax, which is frozen at £325,000, is extended until 2017-18. Secondly, it enables borrowed funds in a foreign currency bank account to be treated in a similar way to how excluded properties—property overseas where the person beneficially entitled to that property is non-UK domiciled—is treated. Filing and payments dates for inheritance tax trust charges will be aligned; as a result of the clause, trustees of property settlements must now file and pay the tax due six months after the end of the month when the chargeable event happened. The measure also introduces a new provision to treat income arising in relevant property trusts that remain undistributed for more than five years as part of the trust capital when calculating the 10-year anniversary charges. That aspect of the measure has raised the most comment, in particular from taxation specialists.

Changes made to the treatment of trusts in Finance Act 2006 brought in a new relevant property regime. Apart from a few exceptions, all settled property, including assets such as money, shares, houses or land, in most kinds of trusts will be relevant property. In addition to the inheritance tax payable when assets are transferred into them, trusts containing relevant property pay inheritance tax when assets are transferred out of the trust, which is the exit charge; the trust reaches a 10-year anniversary of when it was set up, which is the periodic charge; and the trust comes to an end.

HMRC has always taken the view that income retained for too long should not receive that special treatment, but it has been difficult to determine a legal basis for how long is too long. The clause attempts to do that by introducing a deemed rule: retained income will be deemed to be capital if it has been held for more than five years. It is important to note a number of things. First, time before 6 April 2014 will be counted, so any income already held could be subject to charge immediately—for example, if there were a 10-year anniversary on 7 April 2014. Secondly, the deeming rule will apply only for inheritance tax purposes; the income will still be income for all other tax purposes, in particular income tax. Thirdly, deeming rules will apply only for the purposes of 10-yearly charges and not exit charges, meaning that trustees distributing the income will need to consider only the income tax issue, and not potential inheritance tax issues at the same time. Fourthly, when a rule applies at a 10-yearly anniversary, the income will be deemed to have been capped for the whole of the previous 10 years.

As I said, both the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales have concerns about that aspect of the measures introduced by the clause. Both organisations agree that from their perspective, it seems to be change for the sake of change. Indeed, the CIOT goes further, saying that it feels that it has much more to do with raising revenue than with tax simplification, although I note that the tax information impact note states that the measure is expected to have negligible impact on the Exchequer.

Given those concerns about the changes to the 10-year anniversary charge, it would be helpful if the Minister, in his comments on the clause, could outline in detail what problem he is trying to solve. What did he have in mind when the clause was introduced? That might allay the concerns of the CIOT and the ICAEW. It would also be helpful if he could explain to the Committee whether he shares the ICAEW’s concerns that trustees might now be forced to decide about distributing trust income on the basis of an impending tax charge rather than the needs of the beneficiaries.

A little more broadly, there are also concerns that the measure is creating a further mismatch between trust law and tax law. It would be helpful to have the Minister’s comments on the present slight differences in treatment between trust law and tax law measures, and whether he has any intention of making those more uniform.

David Gauke (Conservative, South West Hertfordshire)

Clause 110 and schedule 21 make reforms to inheritance tax. First, the clause freezes the inheritance tax threshold until 2017-18 to help pay for the capping of social care costs. Secondly, the clause aligns the filing dates for reporting the tax liability and payment dates for charges on relevant property trusts and clarifies how income arising in such trusts is treated for inheritance tax purposes if it is undistributed for more than five years. Finally, the clause prevents people from avoiding inheritance tax through the use of foreign currency UK bank accounts.

Clause 110 and schedule 21 help fund social care reforms. In February 2013, the Government announced a package of reforms to the funding of social care, providing financial support for 100,000 more people a year. To help fund the changes, the Government announced at Budget 2013 that the inheritance tax threshold will be frozen until 2017-18.

Clause 110 and schedule 21 make changes to the inheritance provisions to give effect to the freeze, meaning that the threshold will remain at £325,000 for individuals and up to £650,000 for surviving spouses and civil partners. Freezing the inheritance tax threshold provides a simple and fair way to ensure that those with the largest estates, who are most likely to benefit from the reforms, help fund them.

Clause 110 and schedule 21 also introduce changes that will help to simplify how trusts calculate and pay tax. Inheritance tax payment and filing dates can appear confusing and inconsistent. The time limits for paying inheritance tax charges can range from six months after the month in which the transfer or anniversary occurred to almost a year after the chargeable event. Furthermore, in many trusts, the trustees have the power to accumulate or add undistributed income that arises in the trusts to the capital of the trust. In those circumstances, there is little doubt about the correct treatment for the calculation of inheritance tax charges, but it can be different where income remains undistributed for long periods and the trustees have not made any formal accumulation, or where the trust deeds do not stipulate when an accumulation must take place. In such cases, there can be uncertainty about how the calculation should be undertaken, resulting in questions to or correspondence with HMRC to establish acceptable treatment.

The changes made by clause 110 and schedule 21 align the filing and payment dates for inheritance tax charges and make the inheritance tax treatment of retained trust income clearer for trustees and practitioners. From 6 April this year, the date by which trustees of relevant property trusts must deliver an inheritance tax account and pay any tax due will be six months after a chargeable event such as a transfer out of the trust or the trust’s 10-year anniversary. The changes will also mean that any income arising in relevant property trusts that has remained undistributed for more than five years at the date of the trust’s 10-year anniversary will be treated as part of the trust’s capital for the purposes of the 10-year anniversary charge.

I will respond to questions from the hon. Member for Birmingham, Ladywood and set out in a little more detail what the measure is intended to do. As matters stand, it is advantageous for trustees to retain undistributed income in the income account for long periods rather than formally accumulate it as capital, because it will escape IHT on a 10-year anniversary and will also have the benefit of the tax credit for income tax purposes if distributed. Where income has been retained for many years and trustees maintain that they have not yet decided whether to accumulate or distribute income, HMRC challenges the analysis, but without recourse to litigation it is not clear what the true legal position is.

The new legislation does not affect the trustees’ powers to accumulate or distribute income but is simply a deeming rule for IHT purposes. The deeming rule provides certainty about the IHT treatment of retained income and avoids long-running disputes between the taxpayer and HMRC.

I was asked whether the measure will cause trustees to distribute income so as to minimise tax rather than meet the needs of beneficiaries. The purpose of the measure is to provide certainty and clarity for trustees. It remains for the trustee to make commercial decisions about what is best for the beneficiaries. On whether the measure will cause a further mismatch between tax law and trust law, it is worth pointing out that the measure applies only to IHT charges. It stops any avoidance of the 10-year charge. That is its purpose.

I turn now to the final aspect of the clause and schedule, which is the change to the way certain foreign currency accounts are treated for inheritance tax. New rules introduced in the Finance Act 2013 disallow a deduction for a liability for the value of an estate if it has been used to acquire or maintain excluded property, which is not chargeable to inheritance tax. The rules prevent a double deduction and stop avoidance schemes that exploited that tax advantage. HMRC became aware of a loophole that allowed non-residents and non-domiciled individuals to get round the new rules by using a bank account denominated in a foreign currency. Deposits in such accounts are disregarded for inheritance tax purposes, yet are not excluded property. They would therefore not be caught by the new rules and so could be used to gain the same tax advantage that the rules in the 2013 Act were designed to remove.

The changes made by the clause will treat funds in disregarded foreign currency UK bank accounts in a similar way to excluded property, meaning that a deduction for any liability will be disallowed where borrowed funds have been deposited in such accounts so that they are not chargeable to inheritance tax on death. The changes will affect only those individuals who are non-domiciled and non-resident when they die and who have deposited borrowed sums in UK bank accounts denominated in a foreign currency. The changes are expected to affect only about 75 estates a year, but will protect revenue by ensuring that the anti-avoidance rules introduced in the 2013 Act continue to apply.

The freeze in the inheritance tax threshold will help to fund important reforms, which will limit social care costs and benefit many older people. The clause also simplifies the payment and filing rules for relevant property trusts and will ensure that the anti-avoidance rules relating to the treatment of liabilities cannot be sidestepped. I hope that the clause and schedule will stand part of the Bill.

Clause 111 - Gifts to the nation: estate duty

Gary Streeter (Conservative, South West Devon)

The debate on clause 111 will be led by the one and only Catherine McKinnell.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you, Mr Streeter. The clause provides for technical changes to the cultural gifts scheme. It corrects a technical flaw in the legislation and will ensure that the cultural gifts scheme works in line with the publicly stated policy. To understand the policy intention of the cultural gifts scheme with regard to estate duty, it is worth revisiting the legislation as it stands. The cultural gifts scheme was introduced by schedule 14 to the Finance Act 2012.

James Duddridge (Conservative, Rochford and Southend East)

I hesitate to interrupt the hon. Lady’s flow. I would like to claim that was meant to be funny but I in fact just stumbled on my words. I would be interested as to why she is speaking to the clause at this stage and whether she has any preliminary views on why it might be flawed or whether this is more an introductory message about the Labour party’s overall position. I hope I will not have to intervene again and that she will be comprehensive in her remarks, but I stand ready to probe her in detail and I am sure she will be gracious in giving way.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the hon. Gentleman for his intervention, which very much hit the nail on the head. At this stage, we need to reflect on the previous Finance Act when this policy was initially enacted. We had a robust debate at the time, and he is right to query whether we will simply revisit those arguments or whether there is a new proposition we need to look at. It was introduced at the time to encourage lifetime giving of culturally significant objects to the nation in exchange for a reduction in the donor’s income tax and capital gains liability—a policy objective which the Opposition very much supported.

At that time, I did raise concerns about one particular aspect of that legislation, paragraph 33 of schedule 14, which appears to be the subject of the changes provided for in the clause now before us. On behalf of the Opposition, I outlined the concerns that the provisions contained in paragraph 33, announced following consultation, were considered to be significantly different from those originally announced and proposed, something that the ICAEW in particular thought was wrong in principle. Perhaps the fact that the Government are now going to revisit the provisions in the light of “technical flaws” shows that the ICAEW and the Opposition were right to have those concerns. Paragraph 33 of schedule 14 provides a partial exemption from estate duty on exempt objects that would otherwise have become chargeable under schedule 5 to the Inheritance Tax Act 1984 on a gift of property under the scheme.

It is worth noting that estate duty has not existed for many years, having been replaced by capital transfer tax and then inheritance tax. However, under the estate duty legislation, there were rules similar to those contained in the cultural gifts scheme which meant that an estate duty liability could be deferred. In other words, where an asset was of historical or scientific interest, estate duty liability could be deferred and would crystallise on the subsequent disposal of the asset on the open market. While that regime no longer exists, a deferred estate liability would still be a charge to estate duty, as opposed to any other form of inheritance tax.

The partial exemption for estate duty provided in schedule 14(33) to the Finance Act 2012 was intended to be limited to the amount that would be chargeable if the rate of tax was the same as the rate of inheritance tax, which is currently 40%. Where the rate of estate duty attached to the exempt object is more than the rate of inheritance tax—it can be as high as 80%—the policy intention was that the excess amount should become chargeable. However, a technical flaw in the Finance Act 2012 meant that in some cases, on which I hope the Minister will be able to provide more information, the latent estate duty has not come into charge on a gift as it should have done at any rate above 40%, therefore remaining deferred. It means that donors of objects on which there is a deferred estate duty liability are better off donating it under the cultural gifts scheme, avoiding any deferred liability, rather than selling it on the open market. That was apparently not the intention of the policy.

The proposed new paragraph 32A ensures that the intended amount of estate duty comes in to charge by specifying that, for the purposes of estate duty, any qualifying gift to the nation under the cultural gifts scheme will be deemed as if it were for sale at market value and thus allow the intended amount of estate duty to be charged. The scheme has been in effect for more than a year, so will the Minister inform the Committee of progress so far? How many donors have donated pre-eminent objects as a result of the estate duty exemption? Opening the cultural gifts scheme to include those liable for estate duty was intended to provide a greater pool of eligible objects. As I mentioned, the explanatory notes and the tax information impact note suggest that donors may have benefited financially from the technical flaw by donating through the scheme as opposed to selling on the open market. Is the Minister able to give an idea of in how many cases this may have happened or how many donors the Government think may not have had to pay that estate duty and may have benefited from this technical flaw? Are there any estimates of the Exchequer revenue losses as a result of the technical flaw? Considering that estate duty can be anything up to 80%, the Exchequer could potentially have lost significant amounts of estate duty, up to the rate of 40% on any relevant object—that would be in the worst case. It would be useful if the Committee could hear an indication of the level of potential Exchequer losses.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to respond to the hon. Lady in respect of clause 111 which amends the estate duty provisions of the cultural gifts scheme to ensure the scheme works as originally intended. The excitement of discussing the clause could make anyone breathless, but I will do my best. The measure means that a gift of a pre-eminent object carrying a latent estate duty liability, known as a conditionally exempt object, is deemed to be a sale for the purposes of the scheme. This means that donors of such objects cannot receive more of a financial benefit from their donation than if they had sold the object on the open market.

The cultural gifts scheme was announced at Budget 2011 and introduced in 2013. Its purpose was to encourage people to donate pre-eminent works of art and historical objects to the nation. In return, donors receive a reduction in their UK liability, based on a percentage of the value of the object they donate. Individual donors are entitled to a reduction in their income tax or capital gains tax liabilities of 30% of the value of the object. Companies are entitled to a reduction in corporation tax of 20% of the value of the object. The amount of the tax reduction ensures that there is always an element of philanthropy in the gifts: donors will be less well off than if they had kept their objects or sold them on the open market.

Even though it is still new, the scheme has been a great success. People are already enjoying gifts made under the scheme, such as the Lennon and McCartney lyrics now on show at the British Library. We announced at the Budget that an extra £10 million a year in funding is being made available for the scheme, to allow even more objects to be donated under it.

However, there is a technical flaw in the legislation, relating to condition-exempt objects carrying a latent state duty liability. Unfortunately, a consequential amendment was overlooked when the original legislation was drafted. The consequence of that flaw is that estate duty above the inheritance tax threshold of 40% is not always brought into charge on the gift of a condition-exempt object under the scheme, because in most cases the underlying estate duty rules bring the duty into charge only on the sale of an object.

Without the amendments introduced by the clause, a donor could be better off donating an object under the scheme than if they sold it on the open market. For example, an individual could benefit from a waiver of estate duty of up to 80% of the value of the gift, plus a 30% tax reduction. That would clearly undermine the philanthropic purpose of the scheme.

The clause amends the estate duty provisions of the cultural gift scheme and ensures that it will work as intended. For the purposes of the estate duty, any gift of a pre-eminent object to the nation under the cultural gift scheme would be deemed to be in sale at market value. That will allow the latent estate duty above the inheritance tax threshold of 40% to come into charge, ensuring that the scheme works in line with the original, publicly stated policy. The changes will affect only a handful of donors, who may have a pre-eminent object that became condition-exempt before 1965 and that they wish to give away under the cultural gift scheme. We expect the impact to be minimal.

On the questions raised by the hon. Member for Newcastle upon Tyne North about the scale of use of the scheme, eight applications have been made, three offers have been refused under the scheme: one was not owned by the applicant, one was not pre-eminent and the other had the estate duty attached to it and the donor did not want to wait for estate duty provisions to be changed in line with the stated policy. How many offers have been refused because of this issue? One. The donor was asked if they would like to make their offer once the law had been corrected, but they did not want to. How many people have taken advantage of the technical flaw, by giving more than intended? None. The Department for Culture, Media and Sport and Arts Council England, who administer the scheme for DCMS, agreed that they would not register any applications that may have a estate duty on them until the provisions were corrected.

I hope that those points help the Committee and that the clause stands part of the Bill.

Clause 113 - Bank levy: miscellaneous changes

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 27, in clause 113, page 94, line 2, at end insert—

‘(1) Before bringing forward any further changes to the bank levy rates system the Chancellor shall lay before Parliament a report setting out the impact of all tax changes applying to banks since 2010 on—

(a) UK banking groups;

(b) building society groups;

(c) foreign banking groups; and

(d) relevant non-banking groups.

(2) The report will pay particular attention to receipts from—

(a) corporation tax;

(b) the bank levy, and

(c) bank payroll tax.”

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Clause stand part.

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

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to speak on this section, and to follow my hon. Friend the Member for Newcastle upon Tyne North, who did such a remarkable job on the previous clause. Indeed, I should also mention the gallant intervention from the hon. Member for Rochford and Southend East. That might be last time that I say anything complimentary about an Opposition Member, either this afternoon or later.

The clause contains several largely technical changes to the bank levy that arose from a review of its operational efficiency. Those changes were subject to consultation and the measures that were announced were relatively uncontroversial in technical terms. Indeed, when there were problems, some measures were updated to take suggestions into account. However, it is important that the Chancellor, prior to bringing forward any further reforms of the bank levy system, should lay before Parliament a report considering total tax receipts paid to the Exchequer since 2010 by UK banks, building societies, foreign banks and relevant non-banking groups. We want particular attention to be paid to receipts generated from corporation tax, the bank levy and the bank payroll tax. All those things are encapsulated in amendment 27.

The Government’s proposed changes aim to improve the operational efficiency of the bank levy. We do not have a problem with that in principle. Indeed, since the levy’s introduction in 2011, we have consistently highlighted that the Chancellor’s annual revenue targets for it have not been reached. The Red Book says that the changes will

“limit the protected deposit exclusion to amounts insured under a deposit protection scheme…treat all derivative contracts as short term…restrict relief for a bank’s High Quality Liquid Assets to the rate applicable to long-term liabilities…align the bank levy definition of Tier One capital with the new Capital Requirements Directive from January 2014…exclude liabilities in respect of collateral that has been passed on to a central counterparty from January 2014”

and

“widen legislation-making powers within the bank levy from January 2014 to ensure it can be kept in line with regulation”.

The tax information and impact note states that the changes will generate additional revenues to the Exchequer of £35 million in 2014-15, £260 million in 2015-16 and £275 million in each of the three subsequent years.

We have been clear all along that the bank levy is not a bad idea in itself, but the Government have been unambitious for it and the measure has been poorly implemented. Once again, the Government are bringing forward additional changes, which is more evidence of poor implementation and the fact that the Government’s inability to apply the levy correctly has led to the Exchequer losing revenue. It is on record that the Opposition have argued that the initial levy was set at a relatively low rate, both by international standards and when measured against the scale of taxpayer subsidies received by the sector during the financial crisis and after.

When the Chancellor announced the introduction of the levy in June 2010, he confidently asserted that it would

“generate over £2 billion of annual revenues”—[Official Report, 22 June 2010; Vol. 512, c. 176.]

He has reiterated that assertion on several occasions and has been enthusiastically backed by the Prime Minister. In his Budget evidence to the Treasury Committee in 2010, the Chancellor said:

“When it is fully operational the bank levy is going to raise £2.5 billion and we made it clear that we are targeting a revenue sum rather than a particular rate because we think that this is an appropriate contribution that balances fairness with the competitiveness of the UK banking sector.”

At Prime Minister’s Question Time on 12 January 2011, the Prime Minister said:

“The bank levy will raise £2.5 billion each year once it is fully up and running…we will raise £9 billion compared with his £2.3 billion.”—[Official Report, 12 January 2011; Vol. 521, c. 280.]

I think the “his” was a reference to the shadow Chancellor. However, in its first two years, the levy generated just £1.6 billion per year, which was well below the target that the Government had set themselves.

Another problem that has emerged is that the dual objectives seem to be in conflict. By setting the levy as a tax on bank liabilities in excess of £20 billion, and charging a lower rate for more secure long-term liabilities, the Chancellor seemed actively to be encouraging banks to reduce their exposure by moving towards more stable forms of funding. At the same time, however, he wanted to generate “over £2 billion” of annual revenue. Of course, questions have arisen about how the banks would or would not change their behaviour, and how the more they remodelled their balance sheets, the less money the levy would generate. Following one of the Chancellor’s latest projections for the bank levy, a contributor to the Tax Journal said that the continued difficulty in raising the expected yield

“should become a lesson in the problems of saddling a new tax aimed at managing behaviour with a fixed revenue target”.

There is still tension in that system.

The Chancellor has also cut corporation tax annually, thereby handing the banks a tax break. To ensure that the banks do not benefit from that, every time he has cut corporation tax, he has had to raise the levy, which has resulted in it being changed no fewer than seven times. That does not seem to fit with the idea of promoting certainty and stability in the industry.

Consultation is now taking place on wholesale changes to the levy that would lead to the introduction of a band-based system in which the tax of an individual bank is capped at an upper limit of £375 million. Although the Government say that that will be cost-neutral, there is speculation that it could lead to a tax cut for the banks that are currently paying the largest share of the levy. The Opposition have raised that matter before.

We call on the Government to support our amendment to provide for a full and comprehensive review of all taxes levied on the banking sector. I do not hold out much hope that the Government will suddenly change course and accept the amendment—they have resisted such measures in the past—but, as I said earlier, I am an eternal optimist, and when new Ministers take up their post—

Nicholas Dakin (Labour, Scunthorpe)

New brooms.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Indeed, when there are new brooms, we have an opportunity to look at things again. We are pressing our case today because we want the bank levy to bring in the revenue that was expected, and that it was claimed it would bring in for the Treasury. This is not a matter for debate on the present clause, but it is important to recognise that the Opposition would increase the bank levy to raise an additional £800 million a year to fund an expansion of free child care places for working parents of three and four-year-olds to 25 hours a week. That would be of great significance and a great help to many people.

Will the Minister give us an update on the projected increase in Exchequer revenues arising from the clause? How can we be sure that that projection is accurate, given that the initial predictions do not seem to have been accurate? Even at this late stage, will she take account of our call for a full and comprehensive review of all the taxes levied on the banking sector, and accept that that is justified? Will she guarantee that the proposed changes to the levy and the introduction of the band-based system will not lead to the big banks paying less? If it turns out that the proposed changes are a tax cut for the big banks, why should that be a priority at a time when working people are worse off, but the banks can still afford to pay bigger bonuses, which the general public find it difficult to understand?

Andrea Leadsom (Conservative, South Northamptonshire)

First, I thank the hon. Lady for saying that the bank levy is not a bad idea.

Clause 113 and schedule 22 make several changes to the bank levy’s detailed design in response to an operational review in 2013. The changes are designed to strengthen the bank levy’s behavioural incentives while making the tax base simpler and fairer and, importantly, more aligned with recent regulatory developments. Alongside the increase in the bank levy rate made by clause 112, the measures will help to ensure that future years’ receipts meet Government targets.

The bank levy, which is a permanent tax on banks’ balance sheets, equity and liabilities, was introduced by the Government from 1 January 2011. It had two core policy objectives: first, to ensure the sector makes a fair contribution that is reflective of its risks to the UK economy and the wider financial system; and, secondly, to provide incentives for banks to move towards more stable funding profiles, thus reducing the likelihood of liquidity shocks.

As part of their approach to improving the tax policy making process, the Government announced that they would review the bank levy’s design in 2013 to ensure that it was operating effectively. In line with that announcement, a formal consultation was published in July 2013 that considered whether changes could be made to simplify the bank levy, apply it more fairly across the population, align it better with the regulatory regime and reduce its compliance costs for businesses and HMRC. The Government believe that the underlying policy objectives for the bank levy remain appropriate, so they did not include them within the scope of the 2013 review. In particular, they were clear that there are no plans to revisit the fixed target for bank levy receipts, which is currently set at £2.9 billion a year for 2015-16, with the bank levy forecast to levy approximately £20 billion in total by 2018-19.

The 2013 review consultation ran for 12 weeks, and the Government actively sought engagement with a broad range of stakeholders. The representations made as part of that process were used to inform a number of changes to the bank levy’s detailed design. The changes that the Government announced in the 2013 autumn statement were, first, that the exclusion of protected deposits from the bank levy charge will be limited to amounts insured under a deposit protection scheme from January 2015. Secondly, all derivative contracts will be treated as having a short-term maturity from January 2015. Thirdly, relief that banks receive for their high-quality liquid assets will be restricted to the rate applicable to long-term liabilities from January 2015. Fourthly, the bank levy definition of tier 1 capital will be aligned with the new capital requirements regulations from January 2014. Finally, specific liabilities arising from the central clearing of derivatives will be excluded from the bank levy charge from January 2014.

The changes will simplify the bank levy and help to ensure that it applies consistently across banks of different sizes, activities and domiciles. They will also help to ensure that the behavioural incentives for banks to move towards more stable funding profiles are effective and appropriately targeted. Finally, they will help to ensure that the bank levy is aligned with recent developments in the regulatory regime, including the new European markets infrastructure regulation, which aims to increase transparency in the derivatives market.

I turn to amendment 27. The Opposition are asking the Government to lay before Parliament a report that considers overall tax receipts from UK banks, foreign banks, building societies and relevant non-banking groups since 2010. The Government are not minded to accept the amendment. HMRC already publishes statistics on PAYE, the bank levy, corporation tax and bank payroll tax receipts from the banking sector each year, albeit not broken down by different groups of banks. The most recent publication from August 2013 showed that the relevant tax receipts from the banking sector were £21.7 billion in 2012-13, which represented an increase of 6%, or £1.2 billion, on the previous year, despite corporation tax receipts continuing to be depressed by losses incurred during the financial crisis. The publication showed that 2012-13 receipts remain below the peak reached in 2010-11. However, the 2010-11 figure was inflated by receipts from the bank payroll tax, a one-off measure implemented on the day of the announcement that the previous Chancellor had said could not be introduced permanently. I quote the right hon. Member for Edinburgh South West (Mr Darling) in the Financial Times on 1 September 2010:

“It will be a one-off thing because, frankly, the very people you are after here are very good at getting out of these things and…will find all sorts of imaginative ways of avoiding it in the future.”

Bonuses in the banking sector have fallen markedly since the bank payroll tax applied, with the yield from a repeat tax likely to be much lower. The Government have also taken wider action since 2010-11 to tackle unacceptable remuneration and ensure that pay does not incentivise excessive risk taking.

Hon. Members will know that under the Prudential Regulation Authority’s remuneration code, large parts of bonuses must now be deferred and paid in shares. Also, firms are now required to have in place clawback policies to reduce or revoke pay altogether when subsequent information on poor performance comes to light. That was why the Government chose instead to introduce a permanent tax on banks’ balance sheets, which helps to ensure that there is a fair contribution from the banking sector while supporting the regulatory regime by encouraging banks to move towards safer funding profiles.

The hon. Lady asked whether the changes to the bank levy will result in lower revenues. The changes being considered as part of the consultation are intended to be revenue-neutral and will not impact on the target yield from the levy. The independent Office for Budget Responsibility forecasts that the levy will raise £2.9 billion a year from 2015-16. That is seen as a fair contribution that reflects the risks of the sector to the UK financial system and the wider economy. The particular impact on individual banks is not yet clear and will, of course, depend on the detailed design of the banding model, which is itself the subject of consultation.

The hon. Lady asked about the Exchequer impact of the changes. The changes made by the clause will widen the tax base, increasing the bank levy yield by around £270 million a year in the steady state. Alongside an increase in the bank levy rate from 0.14% to 0.156%, that base broadening helps to offset a downward revision in the bank levy forecast and ensures that future years’ receipts meet Government targets.

The changes made by clause 113 and schedule 22 are designed to strengthen the bank levy’s behavioural incentives and make the tax base simpler, fairer and more aligned with recent regulatory developments. I therefore hope that they will be agreed to without the amendment proposed by the Opposition.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I listened carefully to the Minister. I am struck by the important point that a consultation is still going on in relation to the banding and how that would impact on individual banks. That was partly why we tabled the amendment, because we wanted proper information on the exact impact on a range of areas. On that basis, I shall press the amendment to a Division.

Clause 114 - Rates of gaming duty

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I do not want to dwell on this short and fairly technical clause for too long, especially as I am sure that Committee members are eager to move on to bingo duty, which is the subject of the next clause. As hon. Members will be aware, gaming duty is charged on any premises in the UK where dutiable gaming takes place, which includes the playing of casino games such as roulette, baccarat and blackjack. The amount of duty is calculated based on gross gaming yield—in effect, the money gambled minus the winnings paid. It is banded on a single sliding scale from 15% to 50% of gross gaming yield. As in previous Finance Bills, this measure increases the bands for gross gaming yield in line with inflation. The explanatory notes state that the basis of revalorisation is the retail prices index for the year ended 31 December 2013. The figure was calculated at 2.64%, compared with 3.1% the previous year. As in last year’s Finance Bill Committee, I have just one question for the Minister: will he clarify for Committee members what additional revenue the Exchequer will receive as a result of the rise?

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to speak to clause 114, which increases the thresholds for the gross gaming yield bands for gaming duty in line with inflation. The change will take effect for accounting periods starting on or after 1 April 2014. The gaming duty rates remain unchanged. Gaming duty is a banded tax, with marginal rates varying between 15% and 50%. Revalorising the duty bandings will prevent fiscal drag and works in the industry’s favour. Without it, some casinos would pay a higher marginal rate of tax on some of their gross gaming yield. Increasing the bands in line with inflation is already assumed in the public finances, so there is no scorecard impact as a consequence of the changes. I hope that that explanation provides some clarity to the hon. Member for Newcastle upon Tyne North and that the clause will stand part of the Bill.

Clause 115 - Rate of bingo duty

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to consider clause 116 stand part.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I shall deal first with clause 115 and the reduction in bingo duty from 20% to 10%. As Committee members will be aware, bingo duty, similarly to gaming duty, which we have just discussed, is a gross profits tax. In other words, the amount of bingo receipts minus the amount of bingo winnings equates to the HMRC-termed bingo promotion profits. It is those profits that are liable to bingo duty, which is currently at a rate of 20%.

The position differs from that under the previous taxation regime. Until 2009, there was a gross profits tax at a rate of 15% plus VAT. In 2009, that was replaced by a 22% gross profits tax, with bingo clubs becoming partially exempt for VAT reclaim purposes. Gross profits tax was then reduced to 20% in 2010. However, the industry remained concerned about its inability to reclaim all its VAT, which caused investment and refurbishment costs to remain high. I raised that concern on behalf of the Opposition in last year’s Finance Bill Committee. I also pointed out concerns raised by the bingo industry, notably by the Bingo Association, about the impact of the current rate of bingo duty on the industry, the wider economy, and jobs and growth. The Opposition have raised such concerns on numerous occasions.

Duncan Hames (Liberal Democrat, Chippenham)

The hon. Lady has clearly done a lot of work on this subject. That being the case, was she at all surprised that many of her colleagues criticised the Government for acting on the measure in the last Budget?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It is interesting that the hon. Gentleman raises that issue. I will go on to address some of the concerns raised about how the policy was announced; it also relates to members of his party. Obviously, we welcome that change. We had called for the Government to consider it on numerous occasions during debate on previous Finance Bills. However, we also need to address the wider issues in this debate. This is not only about the impact of bingo duty; it is also about the introduction of the machine games duty in February 2013, which according to industry figures will hit bingo clubs with an additional £9.25 million in tax each year. The industry believes that that, combined with a high rate of bingo duty, has left it facing one of the highest starting rates of tax of all gaming activity in Britain.

For that reason, we tabled an amendment to last year’s Finance Bill calling on the Government to explore what consideration they had given to the impact of the rate of bingo duty on the bingo industry, which, as we have discussed in previous Finance Bill Committees, plays an important role in communities up and down the country, but whose bingo clubs are closing at a rate of one a month. As we had sought clarification on why bingo is being taxed at a higher rate than other kinds of gaming, our amendment highlighted the fact that Ministers had apparently taken no account of the impact of bingo duty on the industry, jobs and growth. In fact, when the then Economic Secretary to the Treasury, the right hon. Member for Bromsgrove (Sajid Javid), responded, he discussed only the impact of a bingo duty cut on the Treasury, not the impact on the industry, while simultaneously dismissing any notion that the coalition’s machine games duty might inadvertently have affected the bingo industry.

However, it appears that Ministers had a rethink on the issue in the intervening period. The Chancellor announced at this year’s Budget that he would go further than the industry’s calls to cut bingo duty to 15% and instead cut it to 10%. Clause 115 enacts that provision and is welcome. We called on the Government for many years to explore such a measure, and we are pleased that our calls have been heeded. Indeed, it seemed that the cut in bingo duty, perhaps along with the cut in beer and other alcoholic duties, was possibly one of the most popular announcements in the Chancellor’s Budget, at least until the evening tweet-fest began and that poster surfaced on social media, doing the rounds in the press the following morning after the Conservative party chairman’s tweet that said:

“#budget2014 cuts bingo & beer tax helping hardworking people do more of the things they enjoy.”

I confess that I thought it was a spoof at first, as I believe did the Chief Secretary to the Treasury. He went on to say on national television:

“It may be our Budget, but it’s their words”.

It is interesting to explore whether Ministers really thought they could just fob off working people, patronising them with cuts in bingo and alcohol duties to brush over the cost of living crisis, which the Government have completely failed to deal with. I have some questions, and although I regret that the Chancellor is not here to answer, I would be grateful if the Exchequer Secretary would answer them in his absence. It has been difficult to ascertain exactly what went on with that advert. Did the Chancellor sign it off? Did he or any other Ministers have any part to play in its design or its signing off? The idea that taking 1p off a pint of beer—we have already discussed that people would have drink 100 pints of beer to save £1—or cutting bingo duty and then saying, “Don’t worry, people out there; we’ve solved the cost of living crisis faced by millions of hard-working people up and down this country, and we know what you enjoy doing in your spare time,” just shows how out of touch the Government are. It very much rang that way with members of the public.

Mark Garnier (Conservative, Wyre Forest)

I am curious to know whether the hon. Lady is saying that she would have ignored the calls by bingo clubs for the duty to be reduced and therefore whether a Labour Government would have turned round and said to them, “No, we’re not going to support the bingo clubs; we’re going to keep the bingo duty high.”

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The hon. Gentleman is clearly being ridiculous and not listening to the important points I have made. I have said clearly that we have called on this and numerous other Finance Bill Committees to look at the duty. We welcomed the change, but not the Government’s inability in this Budget to recognise the cost of living crisis that people are facing up and down the country. It was incredibly patronising to suggest to members of the public that 1p off a pint of beer and a tax cut for the bingo industry would somehow solve everybody’s problems.

Charlie Elphicke (Conservative, Dover)

The cost of living crisis—by which the hon. Lady means that wages have not kept pace with inflation—is something that happens after every recession, as she knows. It is particularly deep on this occasion because the recession and the stunning, galactic economic mismanagement that we saw previously brought this country so low for so long that this Government have been turning things around. Very soon, she may regret banging on about the cost of living crisis, as we head to the election with rising wages.

Gary Streeter (Conservative, South West Devon)

Order. I feel obliged to intervene at this point. We are discussing the rate of bingo duty and clauses 115 and 116, and I do not particularly want to go into too much detail about adverts relating to them. Let us continue our important mission on clauses 115 and 116.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you, Mr Streeter, for calling us back to order. I appreciate the point the hon. Member for Dover is making, but it totally ignores the fact that many of the choices and decisions made by this Government—the VAT increase is just one example—have made it a lot worse for ordinary households up and down the country.

Let me turn to clause 116 and the small-scale exemption for adult gaming centres. I would like some clarity from the Minister. Clause 116 relates to an exemption to bingo duty—specifically, the exemption provisions for adult gaming centres—that is available to small-scale amusements provided commercially, which are arcades for adults providing gaming machines with higher payouts than family entertainment centres. The legislation provides for certain types of bingo operation—from domestic and small-scale bingo, to not-for-profit bingo and, of course, small-scale amusements provided commercially—to be exempt from bingo duty. Paragraph 5 of schedule 3 to the Betting and Gaming Duties Act 1981 describes a number of conditions that need to be met for small-scale amusements provided commercially to be exempt from bingo duty, including the maximum levels of stakes and winnings.

One further condition in the case of adult gaming centres, is that such premises should have an amusement machines licence in force. However, as I am sure Committee members know, amusement machine licence duty was repealed in the Finance Act 2012 and replaced with machine games duty. At that point, the reference to amusement machine licensing in the conditions listed in paragraph 5(1)(b) of schedule 3 to the 1981 Act became redundant. Clause 116 seeks to correct that by replacing the reference in paragraph 5 with an equivalent reference to machine games duty in order for adult gaming centres to remain exempt from bingo duty.

I have one question for the Minister. Neither the explanatory notes nor the tax information and impact note on the measure explain what the impact of the technical flaw has been so far. Machine games duty was introduced on 1 February 2013, so presumably from that date until the change in the clause comes into force following the Bill gaining Royal Assent, any bingo in adult gaming centres will not have been exempt from bingo duty as it should have been. Can he tell the Committee what impact this technical flaw has had on adult gaming centres? Has it led to them inadvertently paying more duty than they would have, had the irregularity not been missed? Has the flaw resulted in any notable impact on the Exchequer?

I would be grateful if the Minister would address those points, as well as the important issue relating to the bingogate advert that I put to him earlier.

David Gauke (Conservative, South West Hertfordshire)

Clauses 115 and 116 make changes to the taxation of bingo. The bingo industry plays an important role in bringing local communities together, supporting employment and contributing to British culture.

Before I set out the detail of the clauses, I will give some background. According to the Bingo Association, in the mid-1970s there were around 1,700 bingo clubs in Great Britain. However, as hon. Members will be aware, the bingo industry is in long-term decline and club numbers have fallen drastically. The Bingo Association estimates that there are now only 400 bingo clubs operating in Great Britain. There are many reasons touted for the decline, including changing consumer tastes and the smoking ban. In recent years the tax treatment of bingo has also changed. In 2009, bingo participation fees were made VAT exempt, but the rate of bingo duty was increased to 22%, before being reduced to 20% in 2010.

According to industry figures, there were 43 million visits to bingo clubs in 2012 and 6 million people are retail members of the Bingo Association. Earlier this year, more than 300,000 bingo players signed a petition that was delivered to 11 Downing street asking the Chancellor to cut bingo duty. Their slogan was “Boost bingo”, because they wanted bingo duty to be cut to 15% to boost the industry. I am happy to say that the Government have been able to go further: clause 115 halves the duty to 10%.

Ian Swales (Liberal Democrat, Redcar)

May I pass on to the Minister the thanks of the Beacon bingo club in Redcar? Its members took an active part in the campaign he mentioned and were quite pleasantly surprised to see that it was doubly successful. Should things not work out for me next May, I have been offered alternative employment as a bingo caller.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to learn from my hon. Friend of the support from his own bingo club. Although clearly it must be pleasing to him to have the offer he mentioned, I am sure it will not be needed.

Ian Mearns (Labour, Gateshead)

The fact that the online petition reached 300,000 signatures is of great interest. I was invited to my own local bingo club, the Mecca bingo club in Gateshead. I have to say that I had not set foot in it before and I was stunned by the vastness of the place—it is a really large establishment. However, I still do not really understand why the Minister and his team decided to cut the percentage rate of duty from 2-0, blind 20, to Downing street, No. 10.

David Gauke (Conservative, South West Hertfordshire)

We believe that it was the right thing to do to support the bingo industry. I would describe No. 10 as Dave’s den—put it this way, I do not think it is going to be Ed’s den. It was right to provide support to the sector. As an industry, it was facing a significant and difficult tax regime—one that we inherited, it has to be said.

The hon. Member for Newcastle upon Tyne North tried to convey the impression that she had long been campaigning for this cut in bingo duty, but that is not the impression I got from previous Finance Bill debates. There was a vigorous campaign, and I can think of one or two of my parliamentary colleagues in particular who were prominent in that campaign, not least my hon. Friends the Members for Wyre Forest, for Hastings and Rye, for Gosport, for Spelthorne, for Dover, for Fylde, for Tamworth, for Crawley, for South Derbyshire and for Harlow (Robert Halfon).

Before I start giving too much credit to various hon. Friends for their contribution, let me say that we believe the Budget announcement will allow many bingo clubs to expand. Since the Budget, both major operators and many independent operators have come forward with investment plans as a result of the duty reduction. The Rank Group, which operates Mecca bingo, has committed to develop three new bingo clubs and restart its modernisation programme. Those changes will involve at least £6 million in capital investment over the next three years and are expected to create more than 200 jobs, as well as safeguarding many existing ones.

Gala Bingo no longer plans to close nine of its clubs, protecting almost 200 jobs, and will invest £40 million in stepping up its refurbishment programme. In addition, Gala has announced that it will open a new club in Southampton, investing £5 million and creating 50 new jobs. Castle Leisure is an independent operator that runs 11 bingo clubs. Shortly after the Budget, the Chancellor visited Castle bingo in Cardiff. In the next three years, Castle will create 100 jobs by substantially increasing its capital investment. Castle will invest £5.5 million in refurbishing its existing clubs and a further £7.5 million in developing a new bingo club. Non-traditional bingo clubs are also investing in bingo. Rileys Sports Bars also intends to recommence its roll-out of bingo, creating 60 new jobs.

I hope that provides a bit of an answer to the hon. Member for Gateshead on the benefits of the reduction—and who knows, it might even bring new jobs to his constituency. The reduction will certainly support bingo players living in Gateshead and elsewhere. The changes in clause 115 will enable the industry to grow and secure its future as a safe social activity at the heart of local communities. Miles Baron, chief executive of the Bingo Association, has said:

“We are already seeing evidence that the duty reduction on bingo will be transformational for operators and customers.”

Clause 116 addresses a related issue: bingo provided commercially, on a small scale, in adult gaming centres. Such premises were exempted from bingo duty on the condition that they met certain qualifying criteria, one of which was that they also provided gaming machines and paid amusement machine licence duty. When machine games duty was introduced in 2013 to replace AMLD, the relief was unintentionally overlooked. Clause 116 corrects that by substituting the requirement for an amusement machine licence with a requirement that a machine subject to machine games duty is also provided for play on the premises. Businesses that were covered by the exemption when AMLD was in force will generally be covered after this update. The Government’s intention is clear: such businesses are exempt from bingo duty. HMRC will not be pursuing any bingo duty in respect of such clubs, so there will be no effect on them.

I am delighted that we can pass legislation this afternoon to reduce the bingo duty rate and to reinstate an exemption that was inadvertently lost. It still seems to me that the Opposition are somewhat grudging about the changes we have introduced. They are not so much interested in the substance, but in extraneous matters. The truth is that this Government are delivering a substantial cut that will benefit millions of people and I am delighted to be able to put it in place.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister talked about “extraneous matters”, which drew my attention to the fact that he has not responded to my question. Did Ministers have a role to play in reviewing and signing off the advert that went out on the bingo and beer duty cut, which was clearly insulting to the majority of the population?

David Gauke (Conservative, South West Hertfordshire)

Not for the first time this week, the Opposition are more interested in process than substance. All I would say is that if the hon. Lady wishes to continue this discussion and draw further attention to a reduction in bingo duty that will benefit bingo clubs up and down the country and those who play bingo, she is more than welcome to do so. I, for one, am proud that the Government have taken action to cut bingo duty.

Clause 117 - Rates of machine games duty

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I beg to move amendment 52, in clause 117, page 96, line 7, at end insert—

‘(7) The Chancellor of the Exchequer shall, within three months of Royal Assent, undertake a review of the impact of the higher rate of machine games duty introduced under this section.

(8) The report referred to in subsection (1) above must in particular examine the impact of the higher rate on—

(a) the net profitability of category B2 gaming machines compared with other categories;

(b) the prevalence of category B2 machines;

(c) the usage of category B2 games compared with other category games;

(d) the number and prevalence of betting shops on high streets; and

(e) problem gambling as a result of category B2 games.

(9) 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.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The clause relates to machine games duty, the tax charge on dutiable machine games, where customers pay to play in the hope that they will win a cash prize. The clause provides for measures that introduce a new higher rate of machine games duty, chargeable on any gaming machines where the charge payable for playing exceeds £5. The higher rate of MGD is aimed specifically at a certain category of gaming machine, known as B2 machines, where players can stake up to £100 a play. By contrast, most other category machine games are limited to £2 stakes or less.

There has been much controversy around these machines, which are known as fixed odds betting terminals. I will discuss these later, but there is no doubt that they are increasingly prevalent and frequently used on the high street and in betting shops in particular.

Mike Kane (Labour, Wythenshawe and Sale East)

I do not think my hon. Friend explained the full facts. It might be £100 a play, but a play can take place every 20 seconds.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank my hon. Friend for his intervention. I will go on to explain the full facts—don’t you worry, Mr Streeter. It is the Government’s view that B2 machines in particular, with their higher stake limits, are extremely profitable in comparison with other, lower-stakes machines. The Chancellor therefore announced in the Budget that a new, higher rate of MGD was necessary to increase the fairness of the tax system by making the more profitable high street gaming machines pay a higher rate of duty. The Budget document elaborated further by stating that this new higher rate on the high-stake B2 machines would

“bring their profitability more into line with other gaming machines on the high street.”

The measure follows the Government’s announcement on wider measures to “protect players further”—as the Under-Secretary of State for Culture, Media and Sport, the hon. Member for Maidstone and The Weald (Mrs Grant) recently stated—when using high-stakes gaming machines on the high street. I will come to those measures in more detail shortly, but the Opposition believe that, together with the higher rate of machine games duty provided for in the clause, they do not go far enough in addressing the concerns of local people and local authorities about protecting at-risk gamblers and high streets. The Opposition have therefore tabled amendment 52, which calls for the Government to conduct a thorough review of the impact of the changes on a number of areas. These include the profitability of B2 machines, as per the Government’s stated aim, the number of betting shops on the high street, which was a concern expressed by local authorities, and the prevalence of problem gambling.

Before I turn to the amendment, however, I want to put some of the measures into context. Machine games duty was introduced by the coalition Government on 1 February 2013, replacing the duty regime on gaming machines known as amusement machine licence duty, a band of licence duty that gaming machines were liable for in addition to VAT. The duty was banded according to the different seven categories of machine, which are categorised according to the amount required to play the game, the stake and the maximum prize available—the winnings. The B2 category was created under this regime to account for high-stake gaming machines where the maximum stake is £100 and the maximum win is £500.

The coalition Government replaced that regime with machine games duty in the Finance Act 2012, which also exempted gaming machines from VAT. The Government said it was necessary to put the tax on gaming machines on a more sustainable footing to protect tax revenues and to ensure that the operators of gaming machines continued to make a fair contribution to tax receipts. Machine games duty is charged on the net takings—stakes less prizes—from the playing of dutiable machine games.

The expanded structure is significantly simplified compared with the former regime. There are now only two rates of machine games duty: a reduced rate of 5%, which applies to machines with a maximum charge payable for playing of 20p and a maximum cash prize of not more than £10, which is known as a type 2 machine; and a standard rate of 20%, which applies to any other machine with a charge payable of more than 20p and a cash prize of higher than £10, which is known as a type 1 machine.

The clause replaces paragraph 5 of schedule 24 to the Finance Act 2012 with a proposed new paragraph 5, which instead makes provision for three types of machine, again defined by reference to the highest charge payable for playing a game and the highest cash prize that can be won from the game. The lower rate is applicable to type 1 machines, with a maximum stake of 20p and maximum winnings of £10, the standard rate applies to type 2 machines, with a maximum stake of £5—although there is no reference to maximum winnings—and the higher rate applies to type 3 machines, which the legislation describes as “any other machine”. In addition, the clause provides that the specified values that define the machine types may be increased by secondary legislation. The measures will have effect on or after 21 March 2015.

Before I turn to the Opposition amendment, I want to seek clarification on the operation of the higher rate of tax. The Government’s stated intention for the new, higher rate of tax on high-stakes gaming machines is to bring their profitability more into line with other gaming machines, yet there are concerns that the tax may apply more broadly than to just high-stakes games. The clause implies that the higher rate of machine games duty will apply to the machine—whether a type 1, 2 or 3 machine—as opposed to the games being played on them. As the Minister knows, more than one type of game is playable on a number of machines, so some machines will have both type 2 and type 3 games installed on them. My understanding is that the rate of duty applicable to the machine will be based on the highest-stake game on the machine. In other words, the higher rate of duty will be applicable to all games on a machine, regardless of their individual maximum stakes, if a type 3 game is being played on it.

Will the Minister confirm whether that is indeed the Government’s stated policy intention? If so, will he set out the reasoning behind it? I am interested to hear from him whether the impact of the policy—taxing some type 2 games, as well as type 3 games—was factored into the Treasury’s policy costings. The Budget policy costings document states that the Government expect the measure to raise £95 million a year for the four financial years following its introduction next March. Have those policy costings taken account of the fact that they will also impact on the profitability of lower-stakes games and may therefore affect their prevalence? In that case, might the Treasury have overestimated the revenue that the 25% rate of machine games duty will raise?

That leads to a wider point that I would be grateful if the Minister addressed. If the higher rate of tax will impact on lower-stake games, does it not risk their viability and thus their availability? If it risks undermining those games where the stakes are a fraction of the £100 per spin games that are strongly linked to problem gambling, it might have the perverse effect of creating a proliferation of type 3 games and reducing the availability of lower-stake games. The tax is at the same level regardless of the size of the stake being played. The Government’s stated aim is to bring the profitability of higher-stake games more into line with lower-stake games, but concerns have been expressed that, with these measures, they risk throwing out the baby with the bathwater. I would be grateful if the Minister addressed some of those concerns in his response.

Amendment 52 calls on the Government to review the impact of the measures on several of the biggest concerns surrounding fixed-odds betting terminals. Central to the debate about FOBTs and the higher-stake gaming machines are questions about their impact on local areas and the extent to which they fuel problem gambling.

Ian Swales (Liberal Democrat, Redcar)

I am conscious that neither the hon. Lady nor I were in the previous Parliament, but has she looked at the impact assessment carried out by the previous Government when they introduced such terminals to the high street? Does she agree that many of the problems that we now see were entirely predictable? I am curious to know whether they were predicted at the time.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My concern is that we seem to lack the data to assess the situation. We are legislating for a change in the tax regime, and other activity is going on elsewhere to deal with other concerns associated with FOBTs. It has been accepted—I will go on to explain where—that there is a lack of evidence and data that would enable us truly to understand the impact of those games. We know that there has been a significant proliferation in recent years, so I do not think that it would particularly help the discussion if we were to reflect back on whichever year the hon. Member for Redcar is referring to.

The two key concerns that I mentioned are the impact on local areas and the impact on problem gambling. The first relates to concerns about the prevalence of betting shops on high streets. There are concerns about betting shops clustering on high streets as a result of the cap of four FOBTs per shop and the relatively lax planning laws on the matter. In February, the Local Government Association highlighted research from Deloitte that found that 52% of respondents wanted to see fewer betting shops on their high street. It has since launched a betting commission that works with the industry to address clustering and gaming machine concerns. The LGA, along with numerous councils, including Newham, has called for greater planning licensing powers to deal with problems associated with betting shop clustering. I refer to Newham because numerous reports, including one last year by the BBC, have highlighted the staggeringly high number of betting shops in the area, including a single street that contains 18. According to the BBC, that is more than in any other part of the country.

The Opposition share those concerns, although we appreciate that not all areas are similarly affected. That is why we believe that local authorities showed be empowered to take action in response to local concerns about betting shops and the proliferation of FOBTs. We believe that betting shops should be put into a separate use class so that councils can use their planning powers to control the number of betting shops that open in their area, and indeed that local authorities could be granted the power to restrict the number of FOBTs that are allowed per betting shop from the current maximum of four. Of course, several concerns have also been raised about the link between FOBTs, or high-stake gaming machines, and problem gambling.

B2 machines—type 3 machines, as they will now be known—are high-speed games with only 20 seconds between games, as my hon. Friend the Member for Wythenshawe and Sale East rightly pointed out at the beginning of my comments. There are 20 seconds between games, with no required break in play. Critics have argued that that is what makes those machines addictive, leading to concerns that the immersive nature of those games lulls people into spending more than they might have intended.

The Opposition recognise that features of such games can be immersive and pull some players into “the zone”, as researchers have termed it, where they may spend much more than they intended to. That is why we believe action should be taken to minimise potential harm from FOBTs through, for example: increasing the time between play; introducing warning pop-ups on the machines; and requiring more breaks in between plays that allow players to pause and take stock.

However, we also acknowledge that we are still missing—in response to the hon. Member for Redcar—the necessary information, data and evidence to inform the debate and to understand properly the links between FOBTs and problem gambling. In addition to the increase in machine games duty, the Minister responsible for sport, tourism and equalities, the Under-Secretary of State for Culture, Media and Sport, the hon. Member for Maidstone and The Weald (Mrs Grant), recently informed the House that the Government would

“adopt a precautionary approach and take targeted and proportionate action to protect players further when using high-stake gaming machines on the high street.”—[Official Report, 30 April 2014; Vol. 579, c. 54WS.]

As a consequence, the Minister announced that the Government would make two regulatory changes. The first relates to betting shops on the high street and makes changes to which the Opposition committed last autumn. Betting shops will be put in a smaller planning use class, so that when a bank, building society or estate agent is proposed to be converted, a planning application is now—and should be—required to convert it.

On the regulation of FOBTs, however, the Minister announced that the Government will enforce supervised cash staking above £50. In other words, players will have to interact with a member of staff before they stake anything over £50. The Minister’s written statement conceded that the Government are taking a precautionary approach. Presumably, that means the Government are still not fully aware of the facts or the evidence to make an informed decision on regulating FOBTs, so I would be interested to hear this Minister set out the evidence base behind the Government’s decision to introduce supervised cash staking on stakes over £50. Why did the Government settle on £50? What evidence is there to support that figure? The Gambling Commission recently found that an extremely small proportion of stakes on FOBTs—7% of them—are above £50, so what impact do the Government believe the measure will have?

The recent Government announcement has shown that the debate still fails to be informed by comprehensive, independent data, so the Government are just taking precautionary steps when a well informed approach would have much longer-term value. That is why we have said we will require operators to provide data in a consistent, standardised format and procedure, so that researchers can fully analyse the impact of those machines on players. That is the best way to ensure that we have informed decision making on a hugely important and deeply concerning issue in the future.

The Government still need to answer a number of questions about their approach to betting shops on the high street and on the regulation of FOBTs. They are increasing the duty on such machines to 25%, for the stated purpose of levelling the tax playing field, but it remains unclear whether that measure is, in fact, part of the Government’s approach to addressing those issues, or is just a revenue raiser. Perhaps the Minister could clarify that point.

Amendment 52 would hold the Government to account on their approach to those issues, asking them to set out exactly the impact of the measures contained in the clause. We believe that we need more harm-minimisation measures for high-stake machines, as well as enabling local people to have a greater say over new betting shops opening up. Above all, we need an informed debate on the subject—the necessary information just is not there at present. The amendment would help inform the debate, and it would help the Government to understand better the impact of their precautionary approach to FOBTs. That is why I urge all members of the Committee to support our amendment.

Ian Swales (Liberal Democrat, Redcar)

I wish to make some brief remarks, partly in support of the hon. Lady in regard to the technology involved in these machines. I believe the intention behind the Bill is to place a higher tax rate on B2 games, the high-stakes games. As she rightly pointed out, the terminals typically have other games, particularly B3 games, with a maximum stake of £2 on the same machine. The industry is understandably concerned at these lower-stakes games being potentially taken into the same tax net. They themselves, and I have met the Association of British Bookmakers, know that there is no political mileage in challenging the higher rate on B2 machines; they accept that will happen. However, they—I think we can understand why—do not think it is appropriate to have the higher rate on the B3 part of the games. If we are talking about problem gambling, they also point out that having lower tax rates on lower-stakes games is obviously part of the incentive process to make people trade down.

I am not a cipher for the Association of British Bookmakers, but it is important to ensure that these points are made. It has proposed changing only one word in the Bill—“machines” to “games”. It understands the higher rate for stakes of over £5, but not for lower stakes. Even on the B2 machines, it suggests that if someone plays a B2 machine for only £1 or £2, it could be argued that that should not be subject to the higher taxes—again, partly as an incentive to use lower stakes. The feedback it has had so far, I think from HMRC, is that this is all too difficult and that it can tax only by machine. Now that the bingo tax has changed, the electronic bingo terminals that I am familiar with also have B3 games on them. HMRC has already agreed that it could tax the bingo games at 10% and the B3 slot machine-style games at 20% on the same hand-held terminal.

There is no real technological argument against splitting the games. I do not know whether it is just a drafting point or a genuine attempt to tax the whole machine at 25%, but I would appreciate the Minister’s clarification.

Ian Mearns (Labour, Gateshead)

I echo the sentiments of my hon. Friend the Member for Newcastle upon Tyne North and the hon. Member for Redcar. There is clearly a worrying anomaly here. This all needs to be set in a context in which we all, without exception, promote responsible gambling and eradicate the dangers of people falling foul of a gambling addiction. For those who suffer from a gambling addiction, it can be a life-ruining experience not just for the individual but for their family. We are living in a very changed world. People can use their money as they see fit in betting shops on our high streets, but there is also a whole range of online gaming and gambling opportunities in competition with those betting shops, which can quite easily siphon money out of people’s bank accounts.

I occasionally use a betting shop, but not very often. In fact, the last time was for a free bet given to me by Ladbrokes and I will declare an interest. I bet on Gateshead to beat Cambridge United and Gateshead came up trumps and beat them. The mayor of Gateshead’s charity benefited by £112.50, so it was a worthwhile exercise. The industry, however, could do much more to alleviate the problem of gambling addiction. I spoke to the Association of British Bookmakers about the different organisations in the industry sharing information in a particular locality. If an individual goes into a betting shop to self-exclude because they have a problem, they self-exclude from that individual shop under the umbrella of that company, but they can walk into a betting shop 30 yards away and carry on with their addiction. We need to do much more to share that information across the industry so that self-exclusion can be a remedy.

Mary Glindon (Labour, North Tyneside)

My hon. Friend may recall my example—one of my constituents was self-excluded but he went into a betting shop and presented his partner’s credit card to use, no questions asked. Does my hon. Friend agree that that shows the importance of his point?

Ian Mearns (Labour, Gateshead)

It is all too clear. Being an MP and being interested in the activities of all my constituents, I have visited betting shops in conjunction with the industry. In fact, an important part of Ladbrokes’s national operation—its national audit centre—is in my constituency. Every Ladbrokes betting shop is audited and overseen from an operation in Gateshead town centre; it is an important employer in my constituency. The industry now accepts that it needs to do more to save people from gambling addiction.

Despite the plethora of betting shops on our high streets, there are probably fewer than there were 30 years ago, but they were much better distributed back then—there were more on estates, next to large pubs and social clubs. Now, they are concentrated in high streets and there seem to be more.

We need to ensure that, as part of the Bill, we do not create unintended consequences. We do not want to drive people away from low-stakes games of £2 towards £5 minimum bets on high-stakes games. It would be totally inappropriate for us to pass legislation of that nature. Although I do not think that Government Members will accept our amendment, they need to think about and try to safeguard against that during the Bill’s passage. We do not want to drive low-stakes punters into higher-stakes betting and gambling games. That would be a major mistake.

From the perspective of the betting shop industry, there is a danger of taxing gaming machines in one set of establishments at a different rate from those in other establishments, for example, in bingo halls. Let us have some fairness across the different elements of the industry and try to work together in a much more rounded way to attempt to alleviate those worrying situations.

Mike Kane (Labour, Wythenshawe and Sale East)

It is a pleasure to serve under your chairmanship, Mr Streeter. I agree with my hon. Friends the Members for Gateshead and for Newcastle upon Tyne North that we need an informed debate on the issue, regardless of who is going to be governing the country next year. The regulatory and taxation environment governing the industry will have to change over the next few years. On the Opposition side, the relaxation of some of the legislation in 2007-08 was not good. We were promised a super-casino in Manchester, which was undermined, and we were promised regional casinos. In many senses, a lot of us wanted casinos because they are well-regulated environments with high standards of management. We have been left with high streets cluttered with gaming shops, where there is very little regulation as it is.

Landman Economics found that FOBTs are massively labour unintensive and, for every £1 billion spent on them, it believes that 22,000 jobs are lost to the wider economy. My hon. Friend the Member for Gateshead said that the industry could do more to help problem gamblers and those with gambling addiction. At the moment, only 0.1% of the industry’s £5 billion profit goes towards treating people with gambling problems.

The Campaign for Fairer Gambling commissioned Geofutures, which found that £13 billion was being sucked out of the 55 most deprived boroughs of England. When a proliferation of payday loan lenders’ shops in our poorest boroughs is layered on top of that, it can be seen that those industries are targeting some of the most vulnerable in our society. I go back to the point I made at the beginning: no matter who is in government over the next 12 months or the next four or five years, we will have to begin to tackle this industry and this problem.

Iain McKenzie (Labour, Inverclyde)

It is a pleasure to serve under your chairmanship, Mr Streeter. Naturally, I support our amendment. It is sensible that we start measuring, to get a handle somehow on the extent of the problem with the machines in our communities and high streets. We have asked for five points to be reviewed, but I shall concentrate on just two. First, on the number and prevalence of these betting machines on our high streets, in my high street I am seeing ever more shops springing up with those machines and they are moving out of the high street into the communities that can least afford them.

People in those communities are being encouraged to spend continuously on those machines, as we heard. The speed at which money can be put into the machines is quite frightening. There has been an increase in the number of loans from sources that we would not like people to look for loans from: such loans enable people to play the machines.

Ian Mearns (Labour, Gateshead)

I neglected to say earlier that I have heard senior managers from the industry say among themselves that it was worth their while opening an additional shop on a high street to get four fixed odds betting terminals in that location and receive the proceeds from those machines. That is how important they are to the industry.

Iain McKenzie (Labour, Inverclyde)

I thank my hon. Friend for his intervention.

Secondly, the machines are having a big impact on credit unions in the communities. Some credit unions are now having to say no to people, because they know exactly where they are going with the money that they are getting from the credit unions.

Moving on, across the border, let us consider giving local government the power to say no to such outlets setting up on the high street and so on. I am particularly glad that my Labour-led council has now refused to rent shops to these gambling outlets. However, needless to say they still cannot stop them getting on to the high street and into the suburbs and communities.

Will the Minister accept this amendment, although he has said no to previous amendments? We have had the beer and the bingo and we do not need the bandits.

David Gauke (Conservative, South West Hertfordshire)

The clause makes changes to ensure that one of the most profitable forms of high street gambling—gambling on B2 gaming machines—continues to contribute a fair share of tax revenues. Category B2 machines, or fixed odds betting terminals—FOBTs, as they are also known—allow people to stake up to £100 and win up to £500 per spin. Gambling Commission data suggest that there are now some 33,000 such machines in Great Britain, with the majority located in high street betting shops.

Since the introduction in 2007 of the Gambling Act 2005, betting shops have been permitted to have up to four B2 machines, with the majority taking up their full allocation. Such machines are highly profitable; on average, each machine makes a weekly gross profit of almost £900, which is just over £46,000 a year. Collectively, the machines make annual gross profits of nearly £1.6 billion.

The changes made by clause 117 will ensure that these extremely profitable machines continue to make a fair contribution to UK tax revenues. The rate of machine games duty on the machines’ gross profits will increase from 20% to 25% from March next year, which is expected to generate initial Exchequer revenues of £335 million in total over the scorecard period. This increase in the rate of duty reflects the profitability of B2 machines and the progressivity of the machine games duty regime. Most machines are subject to the standard 20% rate of machine games duty. However, machine games duty already reflects different levels of machine profitability. There is a lower rate of 5% for machines with low stake and prize levels, which tend to generate low profits. The introduction of the new higher rate will ensure that the machine games duty regime extends that progressive approach to the high end as well as the low end. Hon. Members will be aware that the Government have also taken regulatory action on category B2 gaming machines for consumer protection reasons. The tax change is focused on profit.

Sheila Gilmore (Labour, Edinburgh East)

Will the Minister explain whether he thinks the change will have a behavioural change impact, or is it simply seen as a revenue-raising measure? If it is a revenue-raising measure, will that make it less likely that the Government will regulate and reduce the prevalence of these machines?

David Gauke (Conservative, South West Hertfordshire)

As I said, the tax change is focused on profit. Regulation is the responsibility of the Department for Culture, Media and Sport. We believe that the changes will improve the fairness of the tax system, and DCMS will reach its own conclusions about consumer protection as part of this process.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It is strange that the Minister is saying that Treasury policy bears no resemblance to what the Department for Culture, Media and Sport thinks needs to be done to deal with the social issues. Is the Minister saying that the Treasury is looking at this issue purely from a tax perspective and that it does not liaise with the Department for Culture, Media and Sport on its efforts to deal with issues relating to local planning, local communities and health?

David Gauke (Conservative, South West Hertfordshire)

There are a number of aspects of Government policy in respect of B2 machines. Of course, DCMS, the Treasury and other parts of Government will liaise and co-ordinate to determine Government policy as a whole on this matter. The hon. Lady asked what the focus of the measure is. It is to ensure that the tax system is fair and that it contains a degree of progressivity. At the moment we distinguish low-profit machines, which have smaller stakes and prizes, but we wish to bring in a distinction between the machines that include B3s, but no higher, and those that include B2s. That is the purpose of the policy.

Ian Swales (Liberal Democrat, Redcar)

The Minister might have just answered my question, but can I clarify that his intention is to tax B3 games machines that also have B2 games at the higher rate of 25%? Was that his intention in drafting the legislation?

David Gauke (Conservative, South West Hertfordshire)

I was going to come to that point in a moment. Let me be clear about it. It is well understood that gaming machines can have a dual content. The current structure on machine games duty recognises that, provided there is mixed content, the higher of the rates will apply to the machine in question. This is the same approach that is used already for machines that have content that straddles the boundary for the lower rate and the standard rate. It is also worth pointing out that the new 25% rate of MGD will apply only to machines that offer the high-stake games with stakes over £5. It is possible for a bookmaker, if they choose, to remove their existing B2 machines from their properties and replace them with lower-stake machines such as B3 machines, which will continue to be subject to the 20% rate. So it is not an anomaly; it is consistent with our machine game duty that currently exists.

Ian Swales (Liberal Democrat, Redcar)

I thank the Minister for that clarification. Will he confirm to the bingo industry that he is not opening up a new anomaly, so that, if bingo is played on an electronic terminal that also allows B3 games to be played, he will not be taxing bingo at 20% should it be played on such a terminal?

David Gauke (Conservative, South West Hertfordshire)

Let me come back to my hon. Friend about bingo and deal first with the other questions raised in the debate. As I have said, this tax change is focused on profit. Obviously, the change will affect the industry. It has lobbied hard on this matter, but the decision was not taken lightly. We have had to balance carefully any potential impact on the industry against the fairness and progressivity of the tax system as a whole.

Amendment 52 would compel the Government to publish a review on the impact of the new higher rate of machine games duty on the profitability, prevalence, usage and association with problem gambling on these machines in addition to the number and prevalence of betting shops on the high street. The Government carefully consider gambling tax rates and the potential impact on affected industries each year in the Budget, and will continue to do so to ensure that gambling businesses continue to make a fair contribution to the public finances. To that extent, the provision is unnecessary as the Treasury keeps taxes under review at all times.

Furthermore, I would like to remind the Committee that the new higher rate of machine games duty introduced under this clause does not come into effect until 1 March 2015. Consequently, a measure asking for us to respond at an earlier date would not be based on the experience of this measure coming into effect.

Returning to the question asked by my hon. Friend the Member for Redcar, bingo is charged with bingo duty and games content is charged with MGD, so I hope I can reassure him that there are separate regimes and they are charged differently, so his concern will not apply.

Ian Mearns (Labour, Gateshead)

The Minister is arguing against himself. He says that a single machine that has high-odds games and low-stake games mixed will all be taxed at the higher rate, and the answer is to get rid of the machine and put in a low stake machine. From a revenue perspective, that will automatically massively reduce the revenue that it is said that the system will generate, not only because the low-stakes games will still be taxed at 20%, but because the turnover on low-stakes games means that the £900 profit a week that was mentioned in the earlier part of his speech will not be achieved. The Minister is arguing against himself. The technology exists within the machines, through the betting companies’ accounting systems, to distinguish between the different amounts.

Gary Streeter (Conservative, South West Devon)

Order. That was a very long intervention.

David Gauke (Conservative, South West Hertfordshire)

I do not agree with the hon. Gentleman. The point is that if a bookmaker wants to offer a machine that provides B3 games only, it will be taxed as a B3 machine at 20%, which is the current practice. If the machine also offers B2 games, it will be taxed at the higher rate. That is already in place with the MGD. Where a machine has dual content, it straddles two different types of game. It is therefore consistent with how the system works currently. If the hon. Gentleman’s concern is that bookmakers will be discouraged from providing B2 machines, fair enough, but one got the impression from his remarks and those of his colleagues that they would welcome that. The important point, however, is that the proposal is based on machines and it is applied consistently within the MGD.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend the Member for Gateshead raised an important point. The Minister’s reply indicates that the Government do not actually know what the impact of the change in tax rates will be. It could be that more B3 games are offered or it may be that machines are changed to offer lower-stakes games only in order to ensure that they are not taxed at the higher rate unnecessarily. The difficulty that I and other hon. Members have is that the Government do not seem to know what the impact of the changes will be, both on Treasury projections and social factors.

David Gauke (Conservative, South West Hertfordshire)

As with all tax measures, certain assumptions are made about the revenue that will be raised as a consequence and that should come as no particular surprise. In response to the point from the hon. Member for Gateshead that I was trying to address, the way that the MGD currently works is consistent and the proposal does not change the way that that system works. The evidence from bookmakers suggests that they will probably not change their machines, which will continue to be dual content, but we will see. The scoring and the assessment that was made here, as with all measures, was signed off by the Office for Budget Responsibility and was made on the best evidence that we have about the behavioural impact. The change is the right one to ensure a fair approach and that our tax system has progressivity. The more profitable machines should pay a higher rate of tax.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister said that assumptions are made and that projections are based on those assumptions. It might be helpful to the Committee, as I appreciate that he may not have the information to hand, for him to write to the Committee to confirm what assumptions have been made in relation to today’s questions about the Treasury’s projections. Alternatively, the Government could support our amendment, which seeks to examine exactly such issues and to document the process properly so that we can learn lessons for the future.

The rest of the debate is in Hansard.