[2nd allotted day]
(Clauses Nos. 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, Schedules Nos. 1, 18, 22 and 23, and new Clauses relating to microgeneration)
Considered in Committee [Progress, 30 April.]
[Sir Alan Haselhurst in the Chair]
Abolition of contributions relief for life assurance premium contributions
I beg to move, That the clause stand part of the Bill.
It may be for the convenience of the Committee if I say that it will be in order to refer to schedule 18 in the course of the debate. I would then expect the amendments to the schedule to be taken in short order, and similarly the formal question on schedule 18 being the schedule to the Bill.
Thank you for your guidance, Sir Alan. It is a great pleasure and honour for me to serve for the first time under your chairmanship in a Committee of the whole House.
Clause 67 relates to changes to the relief available to individuals for their pension contributions that are used to fund personal term assurance policies, and it also introduces schedule 18 of the Bill. In summary, clause 67 and schedule 18 are a response to a process of consultation with industry, announced at the time of the pre-Budget report, on the application of tax relief to personal term assurance. Throughout that process, and indeed throughout the whole consultation period when developing the new pensions tax regime in the period up to A-day on 6 April 2006, the Government have consistently applied the PBR’s principles for providing tax relief—namely that such relief should support saving for an income in retirement.
Indeed, the Government stated in the 2002 consultation document issued before A-day that
“to encourage people to save in a pension, the Government awards favourable tax treatment...which people must use to provide a secure income in retirement. Most of the savings built up in this way must be used to generate a taxable income in retirement.”
The tax reforms that came into effect last April removed the complexity that had led over many years to different tax rules applying across numerous types of pension scheme. The long-term benefit is a streamlined regime that is easier to understand and cheaper to administer and which was at the time, as it is now, broadly welcomed by the pensions and savings industry.
As we announced at the time of the pre-Budget report, we became aware in the summer and autumn of last year that the rapid growth of pension term assurance—a life insurance death benefit that in most cases was providing no income in retirement—was leading to rising costs and was clearly at odds with the principles we had set out. To deal with the problem, we announced in the pre-Budget report that we would work with the pensions industry to explore, in time for the Budget, how our principle that pensions should be tax-advantaged to provide an income in retirement could be applied to pension term assurance contracts. We announced that any changes we decided to make would not affect either personal arrangements entered into before 6 December 2006 or existing types of employer arrangements.
Following detailed discussions with industry representative bodies, such as the Association of British Insurers, it became clear that a meaningful link could not be provided between those policies and pension saving without making the products commercially unviable or leading to high compliance and tax costs to Her Majesty’s Revenue and Customs and the Treasury. That is why the Budget announced the changes before us today.
In making the changes, we have worked with the industry to protect the position of consumers who had taken out policies before the pre-Budget report announcement in 2006 and, as I will set out in more detail later—either in the debate on the amendments or in the wind-up—we have tabled amendments to the transitional arrangements in schedule 18 to ensure that they work in the best interests of the consumer. On that basis, given the amendments we shall propose to the schedule, I commend the clause to the Committee.
As the Economic Secretary indicated, clause 67 abolishes pension term assurance, which was introduced in its current form in the Finance Act 2004 and was part of last year’s A-day reforms to introduce pensions simplification. This is the third major pensions U-turn since the 2004 Act; it follows hard on the heels of taking residential property out of self-invested personal pensions and the changes to alternatively secured pensions foreshadowed last summer.
I am concerned about the implications of the abolition of pension term insurance and I have four key questions. First, should not the attractions of pension term assurance have been apparent to the Treasury at the outset? Secondly, how has the Government’s thinking evolved over the past few years? The Economic Secretary gave us a flavour of that, to show that it had remained constant, but I contend that the Treasury’s thinking has changed since the 2004 Act. Thirdly, how did the industry respond to the Government’s concerns? Finally, what are the consequences both for the pensions life insurance industry and for consumers?
First, however, I shall consider why pension term assurance was introduced in the Finance Act 2004. Members on both sides of the House are lucky. As part of our pension scheme we receive a death in service benefit. When we die our widow or widower will receive a lump sum, on top of their pension. Our contribution to that benefit is tax-free. If I die as a Member of the House—
It is not something I am anticipating but if, unfortunately, I died while I was a Member my wife would receive a lump sum, which she could use to pay off our mortgage, thus freeing up income. Alternatively, she could invest the lump sum to provide an income.
A substitution effect arises from the death-in-service benefit. The lump sum can be invested either to generate an income or to pay off a mortgage to increase disposable income. The importance of that point will be apparent when I discuss the evolution of the Government’s thought process a little later in my remarks.
I am very fortunate as a Member to have that benefit, but others are not so fortunate. People who are self-employed, for example, will not have the same benefit and will have to pay for it themselves. Prior to A-day, this type of cover could have been subject to tax relief as part of a pension policy. Now, however, as we shall see later, even that is not available to the self-employed. Anyone not covered by an employer’s scheme will have to bear the full cost of cover—something that we do not have to do. In fact, we are doubly lucky because in a sense the cost of the benefit is split between us and our employer. Someone who is self-employed will not only have to pay the full cost of a stand-alone policy, but will not receive any tax relief either. That raises real questions about the affordability of protection cover for many people on low or moderate incomes.
The change that the Government have introduced creates some ironies. We will recollect that yesterday we discussed the incentives for incorporation in respect of small traders. As Taxation recently noted, if the policy is paid for by the employer, it is acceptable. That leads to the ridiculous situation whereby someone operating through a personal service company can get tax relief, but a sole trader or partner cannot. Yesterday, the Government tried to reduce the incentive for incorporation, but this afternoon we are discussing changes that have encouraged it.
When pension term insurance was introduced, the perspective from the industry was that it would lead to the closure of the protection gap. People out there on low and moderate incomes feel, as I said earlier, that they cannot afford life cover to provide for their dependants in the event of their death. It is worth reflecting on a recent article in Money Marketing by Vanessa Owen of Liverpool Victoria. I am afraid that I am going to refer back to it regularly throughout my remarks, because it provides an insightful view of the development of opinion in the industry about the introduction and development of this product and its subsequent abolition. She said:
“Everyone, including consumer bodies and the Government, understands that most people do not have enough life protection to cover sudden death of the main breadwinner or family carer. It is in all our interests to encourage more people to provide for their dependants and reduce dependency on the state. Despite all the talk about the size of protection gaps, since Swiss Re published its data, the problem has got bigger, with everyone scratching our heads over how to solve it. Then came pension term assurance.”
I want to understand the principles guiding the hon. Gentleman’s approach. In 1984, tax relief on life assurance products was abolished by the Government of the day. Is the hon. Gentleman suggesting that we should revisit that principle and that tax relief on life assurance and term assurance products should be reintroduced? Should we reverse the 1984 decision?
It is interesting that the Minister raises that point, because the Government effectively reintroduced the relief in their A-day reforms for pension term assurance and they are now seeking to abolish it. What I aim to achieve this afternoon is to understand rather more about the Government’s thinking on that matter, particularly why they felt it appropriate to introduce this tax relief in 2004, when they want to remove it 2007. That is the purpose of my remarks today.
What the introduction of pension term assurance enabled in the 2004 Finance Bill was the creation of a level playing field, so that the indirect tax relief that we receive through our contributions to pension schemes, which gives us death-in-service benefits, is also available to others who are in a less fortunate position than us. It is worth reflecting on the debate that took place on the 2004 Finance Bill. The right hon. Member for Bolton, West (Ruth Kelly), who was then Financial Secretary to the Treasury, said in the Standing Committee debate:
“Simplification will introduce greater individual choice and flexibility.”
She continued—this is the key quote—by saying:
“For the first time, everyone will have the same opportunity to make tax-relieved pension savings over a lifetime.”—[Official Report, Standing Committee A, 8 June 2004; c. 427.]
She referred to the creation of a level playing field.
I will happily give way to the hon. Member for Wirral, West (Stephen Hesford) who pre-empted the Economic Secretary by a second. I am sure that the Economic Secretary will remember that in future.
I am obliged to the hon. Gentleman for giving way—I think. Does he not accept that, by and large, as I understand it, the financial press did not really bat an eyelid about this measure? The only point that the financial press seemed to make was about the timings and implementation. That is why the Government have tabled the various amendments to schedule 18. Given that there was not really the clamour that he appears to be trying to make out that there was and given that the Government have tabled amendments Nos. 6, 7, 8 and 9 to schedule 18, does he not agree that those amendments are the best way forward and will he support them?
I will not discuss the amendments at this point. I think that you indicated in your opening remarks, Sir Alan, that we may have a brief debate. We will support the amendments, because they help the Government to get out of a bit of a hole that they have created of their own volition. The Government dealt poorly with the transitional arrangements and there was a lack of clarity about the original statement that was made at the time of the pre-Budget report. That led to some concern and confusion about whether there would be relief for pension term assurance that was included within a pension policy and whether that tax relief would still continue. We have clarity now, whereas we did not have it in December. So, we will support the amendments.
I am a little perplexed by the hon. Gentleman’s remarks about the lack of concern in the financial press, because my reading of that press—particularly at the time of the pre-Budget report—was that there was a significant degree of concern among members of the industry. Certainly in conversations that I had in the aftermath of the pre-Budget report, there was quite significant concern, particularly given that so many industry members—I will come on to this later—had invested a significant sum in preparation for the launch of the policy. They are now left trying to administer a relatively small number of policyholders.
To go back to the question of principle—it is important that we establish the principles that are guiding us in these debates—the hon. Gentleman quoted one of my predecessors, a former Financial Secretary, talking about tax relief for pensions. But term assurance is about not pension income but death benefit. It is a life insurance product. Does he accept that it was never our intention to tax-relieve non-pension savings in the manner that has transpired, or is he saying that introducing a tax relief for term assurance is his proposal to close the contributions gap—as he referred to it?
That is slightly curious. If it was not the Government’s intention to introduce tax relief for pension term assurance, why on earth did they include it in the Finance Act 2004? The Government put the measure forward three years ago, in that Finance Act, but are now seeking to reverse it. If it was not their intention to have that provision, why did they include it in the first place? That is the problem that the Economic Secretary has to think about. The reality is that the measure was well understood by the industry. Perhaps the Economic Secretary will tell us why the Government included the provision in the Finance Act 2004, because the Committee would be interested to hear that. I would happily give way to enable him to give that explanation. [Interruption.] The Economic Secretary says that he will give an explanation in his speech. Well, we have heard that before.
If we go back to the Committee Hansard for the 2004 Finance Bill, it is interesting to note that there was no discussion whatsoever on the introduction of pension term assurance. According to my reading of Hansard, that clause seemed to pass through without comment. The then Financial Secretary to the Treasury did not give the merest warning that abuse could lead to the scheme being closed down; that is in stark contrast to the warning that she gave about alternatively secured pensions.
The Government introduced the tax relief back in 2004, and when one talks to people involved in the industry, one finds that their view is that the Government should have been aware of the impact of the relief on the life assurance market. As the Association of British Insurers said:
“Even before this change was made, the insurance industry told the government of the positive effect this could have on the term assurance market.”
It was an opportunity for that market to rejuvenate itself. That should have come as no surprise to the Treasury. Indeed, some people were so concerned that the change would lead to a large-scale re-broking of business that they started to lobby the Treasury. I once again point out what Vanessa Owen of Liverpool Victoria said:
“When I first read the proposed death benefit rules back in 2004, I wondered if boards of directors across the country would be turning pale at the risk of churning to in-force books. But after much lobbying, it became clear the rules were not going to change before A-day”.
There appears to have been plenty of discussion and debate before A-day, and what happened should have come as no surprise. Indeed, when I spoke to a group of industry experts in January this year, I specifically asked them whether the take-up of pension term assurance should have come as a surprise to the Treasury, and they emphatically said no; the Treasury should have been aware of the scale of interest.
The effect of the A-day change was to encourage people to think again about life assurance, as they could pay their premiums net of the basic rate of tax, if they were basic rate taxpayers, or net of the higher rate of tax, if they were higher rate taxpayers. When consumers went to see their financial adviser or someone at the bank, the person giving them financial advice would have been remiss if they had failed to point out that they could take out pension term assurance at a lower cost than normal life assurance, because of the generous tax relief introduced by the Government in their Finance Act 2004. It is worth considering one insurer and the rates that it was offering. According to an article in The Times, a male non-smoker buying £300,000 of level-term cover from Legal & General would pay £27.25 a month in cover. If he chose pension term assurance, he would pay £25.25 a month in cover if he was a basic rate taxpayer, but if he was a higher rate taxpayer, he would pay only £19.39. I suspect that the hon. Member for Wolverhampton, South-West (Rob Marris) is thinking about the difference between £27.25 and £25.25 and saying to himself, “That does not sound like the basic rate reduction,” and indeed it is not. There is recognition in the industry that the cost of pension term assurance cover was higher than the cost of basic cover, if we exclude tax relief.
There were significant caveats about pension term assurance cover. As Richard Eagling, the editor of Investment, Life & Pensions Moneyfacts says:
“Although price is not the only differentiating factor to be considered when choosing between the two, the cost savings cannot be ignored, and for those clients who have no existing cover in place, the case for PTA is compelling.”
Consumers were warned that the policy might not be for them, as an article in The Sunday Telegraph said:
“For a start, only basic life insurance is available with these PTA packages. The tax-breaks do not apply to extras that are often added on to conventional term assurance products, such as critical illness cover which pays out if you suffer a serious illness that leaves you unable to work. Family income benefit is not covered either—this product pays out an annual income on death rather than a lump sum.”
So there were caveats in respect of the sale of such policies; it was not a straightforward slam dunk, as it were, to sell the policy to clients. There was a proper process that had to be gone through. Certainly, the increased affordability of term assurance would enable people who had previously found life cover prohibitive to take greater personal responsibility for their family, but as I said earlier, it also gave those with existing life cover the chance to see whether their cover could be re-broked.
Again, Vanessa Owen made some perceptive comments about what happened in the industry at the time. She said:
“What we did find was that, although not a storm, life protection volumes started to pick up from all channels. Consumers were interested in the tax relief message which was clearly stimulating demand although, judging by our average premium levels, it was not wealthier clients who were buying but people on more modest means.
In other words, it was not just the wealthy who were taking advantage of another opportunity to claw back higher-rate tax relief but also regular policyholders looking to take out life cover at a competitive rate.”
What about churning—the re-broking of in-force life protection? Vanessa Owen said of the in-force life protection book:
“It has remained largely intact, with rebroking activity at a minimal level”,
so it appears from her evidence that people on low and moderate incomes were taking the opportunity to put in place cover that they may have considered too expensive before.
The interest in pension term assurance should have been apparent at the time. It certainly seemed to attract new customers. Has the Minister asked his officials to conduct any research into who purchased the products, and did the research that the Government conducted reflect Miss Owen’s perception of the change of business in the market?
If so many businesses were thinking of taking advantage of the introduction of pension term assurance—clearly, the Liverpool Victoria thought about it—why was that not obvious to the Treasury? Plenty of people seem to have told the Treasury. Why did not the Treasury realise sooner what the take-up rate would be, or was it so naive that it did not think it would happen after all, or so incompetent that it did not think of taking action prior to A-day?
It is worth noting the cost of the Government’s failure to take action. According to the regulatory impact assessment, the estimate of lost tax revenues if the clause is not reversed would be £160 million, out of a total estimated cost of £250 million for A-day reforms. What was the Government’s original estimate of the amount of tax relief that would be claimed as a consequence of introducing pension term assurance? Presumably, in their calculation of the £250 million, they would have produced an estimate back in 2003-04. It would be interesting to understand the difference, from the Minister’s perspective, between the original estimate and the current revised estimate, as set out in the regulatory impact assessment. If the Minister knows, I should be grateful if he enlightened me and the Committee about the difference between the estimate at the time that the A-day reforms were consulted on and the £160 million cost referred to in the regulatory impact assessment.
I fear that the hon. Gentleman is in danger of misleading the Committee. The regulatory impact assessment refers to the cost that would arise to the Exchequer, had we not taken action at the time of the pre-Budget report. As I said, it was never the Government’s intention to incentivise through pensions tax relief what became a rapid switch to pension term assurance. It was to prevent that cost from arising that we acted. I am still trying to work out whether the hon. Gentleman is supporting our action to protect the revenue base, or advocating a reversal of the 1984 decision not to tax advantage life assurance. On that question of principle, he still has not given us any clue.
I am only up to page 6, so there is plenty of time before we discuss that.
I hope I did not inadvertently mislead the Committee. I am clear that £160 million is the Government’s estimate of what the costs would have been in the future. It would be interesting to know what they think the cost is now and what they thought the cost might have been. [Interruption.] The Economic Secretary says from a sedentary position that the cost at present is none, but we have had nine months of sales of the products. In a parliamentary answer, he told me the number of sales in the quarter to June and the quarter to September, so there would be some indication of the cost to the Exchequer. I am keen to understand what the Government’s estimate of cost was at the time that they conducted their pre-A day consultation. The Minister still has not responded to that question. I happily give way to him.
The estimate would have been that it was a negligible cost, because it was not the Government’s intention to tax-advantage term assurance. The hon. Gentleman is not answering the question whether, as a matter of principle, he supports the extension of tax relief to life insurance and term assurance products to close what he has called “the coverage gap”. Until he answers that question, it is hard for the Committee to understand whether he supports or opposes our proposals. At the moment, he is just drifting in the middle.
In my political career, I have never been accused of drifting in the middle on anything.
My hon. Friend is ploughing a steadfast course through the middle of the Economic Secretary’s argument, and he is right to press the Economic Secretary. I struggled through the Red Book in an attempt to find an estimate of the current cost of relief to the Treasury, but I could not find anything. The Economic Secretary tells us that the amount was negligible in the past, which suggests that the Treasury had no idea not only what the relief would amount to, but that it was allowing it in the first place—he has just told us that it was unintentional relief. My hon. Friend is doing a noble thing in getting to the bottom of the matter.
Order. The hon. Gentleman is making a very long intervention.
It is remarkable that the Government introduced a change that happened to slip unintentionally through the legislative process and past the eagle eyes of the Treasury and Her Majesty’s Revenue and Customs and that it will cost nothing. That does not stack up. I cannot understand whether the Treasury was naive or incompetent when it introduced the measure and failed to understand the ramifications. My hon. Friends are encouraging me to believe that it was both naive and incompetent—I am a generous man, and one or the other is enough for me.
The Economic Secretary has raised the question of the future cost of the policy. I assume that the £160 million figure is an annual cost, and I am intrigued to know what assumption he made on how that cost would build up. Does he expect growth to continue at the rate of the increase in sales that took place towards the end of last year prior to the closure of the schemes? Does he expect the rate of growth to plateau? Or was there simply pent-up demand out there, because people who could not previously afford to take out such cover suddenly rushed to do so?
The regulatory impact assessment does not make it clear how the Government reached the £160 million figure—I presume that the logic is more robust than the estimate of negligible cost, which the Government made when they introduced the pre A-day consultation. It will be interesting if the Economic Secretary elaborates in his answer on how officials calculated the cost of £160 million.
The Economic Secretary has nodded, and I am delighted that we will be furnished with that information.
I want to refer to a broader point in that context. At one level, this Government, more than any other Government, understand the behavioural impact of changes to the tax regime; otherwise, the Chancellor would not meddle in the tax regime quite as frequently as he does. At the same time, there has been a fundamental failure properly to think through the behavioural impacts of those changes and the extent to which increasing reliefs, cutting rates or increasing allowances would change people’s behaviour. The Association of British Insurers indicated prior to A-day that those products would have a positive impact on the term assurance market, with new policyholders taking advantage of the increased affordability of products.
The Treasury does not seem to have responded. It does not seem to have thought through whether the situation would encourage new participants to enter the market and offer new policies to try to close the protection gap. One of the problems is that the Government have not properly thought through their A-day reforms; that is why this is the third U-turn on those reforms since they were enacted in the Finance Act 2004. Slowly but surely, the Economic Secretary is unpicking the work that one of his predecessors, the right hon. Member for Bolton, West, did when, as Financial Secretary, she was responsible for the same areas. I feel sorry for her at times. She must be wondering why on earth she spent so much time working on these reforms only for the Economic Secretary, who was at the Treasury at the time advising the Chancellor in some capacity, to conduct a series of U-turns once they were on the statute book.
We can see how, and how quickly, the Treasury’s approach to pensions has unravelled over the course of the past couple of years in moving on from the intention that was set out in the then Financial Secretary’s speech in Standing Committee only three years ago. In the context of the Pensions Commission report, the 2006 Budget said that one of the five tests that the Chancellor set to see whether these reforms were acceptable to him was whether they would promote personal responsibility. Yet here we are with a product that would appear to promote personal responsibility and reduce dependency on the state but that the Government are seeking, through this clause, to abolish.
In last year’s pre-Budget report there is a section headed “Fairness for tomorrow’s pensioners”, where, at paragraph 5.77, the Government casually say that they have
“become aware that, at a result of the flexibilities that the new pensions tax regime has brought in, life insurance policies that provide lump sum death benefits alone are being offered as personal pension arrangements eligible for pensions tax relief.”
If the industry knew about it prior to 2004 and A-day, why did the Treasury just happen to become aware of it? Surely it should have played a much more active role in understanding what was happening in the market and what would be the impact of the legislative changes that suddenly crept into the Finance Act 2004.
In this year’s Red Book, we have greater amplification of the Government’s approach to pensions tax relief so that no one can be in any doubt about what might happen in future. It sets out some key principles that have guided and continued to underpin the Government’s approach to pensions tax relief, one of which the Economic Secretary repeated in his brief opening remarks. It says that
“generous tax relief is provided for pension saving to produce an income in retirement. Pension saving is not, however, provided to support pre-retirement income, asset accumulation or inheritance”.
Let us ponder for a moment the meaning of that principle. The death in service benefit that our widows and widowers receive on our death as Members can be used to be invested in an income in the same way as a widow’s pension. It can be used as an alternative to pay off the mortgage so that their existing income is protected. Yes, we are talking about a lump sum that is gained on death, but the purpose to which it is put can enhance the widow’s or widower’s pension by supplementing it through direct investment or by repaying the mortgage debt with which so many people are burdened.
Will my hon. Friend give way?
I would like to make some more progress, but I am happy to give way.
Will my hon. Friend clarify whether such payments into pensions arising on death in service will be made free of taxation?
If one is a member of an occupational scheme, the contributions are subject to tax relief, and many such schemes clearly include death in service benefits. The Government are trying to remove the opportunity for those who are self-employed or not part of such a scheme to receive the tax relief on a stand-alone, pension term assurance policy. Another key principle that underpins the Government’s approach to pensions tax relief emphasises that point. The Red Book states that
“incentives for employer contributions are provided as it is more efficient for pensions to be provided on a collective basis through the employer”.
What happens to those who are not in employment—the self-employed and temporary workers? They will not benefit from tax relief on a stand-alone policy. Indeed, other changes make it more difficult for them to get that tax relief. They will have to bite the bullet and not only pay the costs that we pay in our pension contributions and the sort of costs that the Exchequer pays into the parliamentary pension scheme, but get no tax relief. They are therefore hit by a triple whammy and in a far worse position than us as employees in the context of death in service benefit and how to fund it.
This is the last time that I shall try. The hon. Gentleman has clearly outlined the principles that guide the Government’s approach, which I set out in a speech a month or two ago and has appeared in repeated documents. His speech makes it clear that he disagrees with those principles because he advocates the use of pension tax relief to pay for term assurance, life assurance and products for individuals. As I said, that is a reversal of the 1984 position. I shall give him one last chance to confirm that he is taking that principled position. He was concerned when I suggested that it was unprincipled. Have I outlined his principled position? This is his moment.
I acknowledge the Economic Secretary’s persistence. He is trying hard and, at some point, I might satisfy him. However, he ought to tell the Committee why the Government sought in the Finance Act 2004 to reverse the position that was adopted in the early 1980s. I am intrigued to hear his arguments.
My point in opposing the measure is more about the Treasury’s chaotic approach to policy making and the impact of the change on consumers and the industry. It is clear from speaking to people in the sector that there is a problem with the protection gap. The Economic Secretary and I support the concept of financial inclusion and want to spread to more people the benefits that those of us who are lucky enough to be in employment enjoy. We should consider carefully the way in which we spread those benefits, but that is not a commitment to tax relief because, as I said yesterday, we are not in a position today to write the first Budget of the next Conservative Government.
Does the hon. Gentleman’s opposition amount to agreement with the Government?
That was a simplistic question. People oppose measures for many and varied reasons. If the hon. Gentleman survives into opposition, perhaps he will understand the way in which such decisions are made. I am not sure whether I hope that he experiences that, but he might.
My final quote from the Red Book demonstrates the hubris of a Government who are 10 years into their life. It states:
“The Government recognises the importance of a stable environment that allows the pensions industry to plan ahead and minimise disruption to the regimes already in place that are working well.”
That comes from a Government who have already made three main U-turns on their post A-day reforms. How many more are consistent with maintaining
“a stable environment that allows the pensions industry to plan ahead”?
When the Economic Secretary read that bit and let it go through, he must have smiled at the irony of those remarks, and at how many people in the industry would not recognise the Government’s principle in relation to the reforms of the pensions system. Another principle is that the cost of pensions tax incentives must be affordable and fall within current fiscal projections. I am sorry that I forgot to mention that earlier, because it is relevant here.
This raises a doubt in my mind, and in the minds of those in the industry, about what other changes might be planned if the cost of these reforms continues to mount. Will the Economic Secretary unpick other measures in next year’s Finance Bill? Will the Government take fright at the levels of the lump sum contributions that many people are putting into their pension schemes this year? I recognise the importance of the argument about affordability, but this leaves the door open to further U-turns in the future.
Where does this leave the consumer and the industry? Let us consider the industry first. It estimates that it has invested some £35 million in new systems and processes to introduce the type of policy that the Government have created, and that sum will have to be written off. This sudden withdrawal without consultation has left an estimated 50,000 policy holders in the pipeline. Insurers could not deal with inquiries promptly because there was so little information available from the Treasury when the announcement was made.
The final details of the transitional arrangements were announced only on 13 April, a few days after the previous deadline had expired. That is not an orderly way in which to conduct business. I know that the industry is pleased that those transitional changes have been made, and we should welcome them on that basis, but this is not the way to make policy. All sorts of changes had to be made by the industry: automated advice systems had to be amended to redirect customers to alternative products, for example, and the industry now has sub-scale portfolios of business to administer for the next 25 years or so.
The Minister and I agree on the importance of maintaining London as a global financial services centre, and we recognise that insurance, along with other financial services, covers a global market. Companies seeking to expand their businesses need to think carefully about how and where they use their capital. It will not help the UK market if there is a perception that we have an unstable, unpredictable pensions tax regime.
It is also worth pointing out that the industry has sought to reach a compromise with the Treasury on this issue. It has come forward with a series of proposals to facilitate the continuation of this type of business, as it recognises the importance of the protection market. It is also thinking of ways of avoiding writing off such a large investment in the new systems. It has proposed that all pension term assurance offers would contain clear information about the pension to which they were linked, including details of the provider and a policy number, reinforcing the link that the Government think is so important between the term assurance and the pension. That would produce an integrated policy that provided a pension and a lump sum death benefit. The industry made that proposal so that contributions could continue, but the Treasury rejected it. In effect, it rejected that position before A-day.
The lack of clarity in the Government’s position on integrated products is such that in one of today’s amendments to schedule 18 we see explicit recognition of that type of policy and of the new transitional arrangements involved. The industry also suggested, as an alternative, that it would cap the amount of the lifetime allowance that could be utilised by taking out term assurance. A third of the allowance, about £500,000, was suggested, but again the Treasury rejected this attempt by the industry to reach a workable compromise.
Many consumers have therefore been left with a protection gap. Those who are outside an occupational pension scheme will have to pay more for the coverage that all Members of the House take for granted. There is an uneven playing field, which favours those who are lucky enough to be in jobs that have a death in service benefit as part of the package, and disadvantages those who are self-employed or contractors. Perhaps more sole traders will be encouraged to incorporate, despite the Government’s best efforts yesterday, to access the tax relief that comes from being an employee.
Another important issue is that consumers and industry cannot assume that just because something is a Government policy one month, it will be a policy next month, next year or the year after. That undermines consumer confidence in saving for the long term. In a subtle but important way, it undermines the Government’s long-term goal for more people to take responsibility for their financial affairs. That has a destructive effect on the industry and on consumers’ willingness to plan for the long term. Every Member of the House recognises the importance of that, and we have had many debates about the Pensions Bill, which is an attempt to encourage more people to save for the long term. One message seems to be coming out from the Department for Work and Pensions, and a different one from the Treasury and the Economic Secretary.
Two quotes highlight the combined impact of the change in policy. First, Vanessa Owen of Liverpool Victoria—perhaps I should start to pay her royalties, given the number of times that I have quoted her—said:
“Our members and customers who do not have access to life assurance through their employer are now at a greater disadvantage because the option of tax relieved life protection has been removed.”
Secondly, according to AEGON,
“Not to mention a complete waste of millions of pounds in making pension term assurance available in the first place, following extensive consultation with the Treasury.”
Finance Bill by Finance Bill, the Economic Secretary unpicks the work of the former Financial Secretary, the right hon. Member for Bolton, West. Instead of the clear, simple scheme that she advocated, we have an increasingly complex and restrictive scheme. It is surprising that the pitfalls were not seen, and warnings not given, when the legislation was introduced in 2004. The Bill is destructive—it undermines the confidence of consumers in the stability of the Government’s pensions policy, inhibits both innovation and the sector’s willingness to respond to Government initiatives, and is destructive of the Treasury’s ability to make policy in an area in which long-term stability is fundamental if we are to promote long-term savings.
The hon. Member for Fareham (Mr. Hoban) spent three quarters of an hour teasing out the issues, as he put it. I shall be very much briefer.
The hon. Gentleman started well in explaining the origins of pension term assurance, and making the point that it was an entirely innocent and reasonable way in which the industry should evolve. All individuals are faced with the question of how to hedge the risks when they look forward to their old age. There is the risk of death, and in that regard we provide for our dependants either in the form of a widow’s pension or a lump sum. We must also hedge against the risk of living, and therefore provide an income for ourselves. It is entirely sensible and natural that the two sets of risks should be considered together, as many pensions providers do, and many of us are beneficiaries of such an arrangement. It was therefore natural that the industry should evolve a product that sought to provide those two activities together: pension term assurance. As the hon. Member for Fareham pointed out, in 2004, the Government saw no problem with that, and extended tax relief.
With regard to the Government’s answer, about which the Economic Secretary has intervened several times, there are two issues. He has laboured the point about the need to maintain the integrity of the distinction—which he calls the principle, although it is probably more an established practice than a principle—between tax relief for pensions and tax relief for life insurance. Clearly, that is established practice, and must be maintained. The practical issue, however, is not so much the restatement of that principle as tax avoidance. There are clearly individuals who have seen, and would see in this new product, an opportunity to maximise tax relief on life insurance products, particularly if they have high incomes and are able to take advantage of higher rates of relief.
What I would like to know—and the Economic Secretary might strengthen his case if he told us—is how much of the £150 million or so that the Government hope to retrieve originates in the higher tax relief. If it is true that, as the hon. Member for Fareham suggested, this product was designed principally for people on low incomes, we can see that it may have evolved in a fairly innocent way; but if it is designed for high earners—we are talking about 40 per cent. tax relief—I am more sympathetic to the Government’s view that there is a potential for avoidance. It would be helpful if the Economic Secretary could give us an idea of the relative proportions.
The Liberal Democrats approach the matter differently from the Conservatives: from the opposite direction, in a sense. We are not trying to maximise the scope for tax relief. Generally, we have gone rather further than the Government in arguing that there is no justification for giving people on high incomes not just more tax relief, but higher rates of tax relief, on pensions, let alone life insurance. However, we agree with the Conservatives that the distinction between what happened in 2004 and what happens now has created confusion, and has not been terribly well handled.
I should like to hear from the Economic Secretary how the Government responded to proposals from the industry. The hon. Member for Fareham summarised ways of meeting the Government’s requirements that had been suggested by the Association of British Insurers and others, some of which seemed perfectly sensible at first sight.
If the Government’s primary concern was to maintain the link between life insurance and pensions, organisations in the industry were willing to propose ways of checking that it was being maintained. They suggested, for instance, that if someone died and life insurance was claimed, it should be checked that there was a parallel pension product to maintain the integrity of the connection. Perhaps the Economic Secretary will tell us whether that proposal was explored, and whether it was deemed feasible. Organisations also suggested a limit on the tax relief that could be available, and a mechanism for fraud checking.
I have a sense that the industry has gone out of its way to try to meet the Government halfway, addressing their central concern that there must be a link between the life insurance and pension elements. As for how far the Government have gone to meet the industry’s concerns, I have an open mind. Our stance on whether the clause should stand part will be determined partly by how they respond.
I want to reiterate some of the points made by my hon. Friend the Member for Fareham (Mr. Hoban) in his comprehensive and thorough speech. I shall cover some of the same ground, however, because it would be difficult not to: my hon. Friend really did cover the waterfront. It is worth my repeating one or two of his points in the hope of provoking an answer from the Economic Secretary.
It is not entirely clear what was the rationale for the simplification of the rules governing pension term assurance in the Finance Act 2004, which came into force on 6 April 2006. The Economic Secretary made it clear that it was never the Government’s intention to encourage the granting of tax relief on products that were not connected with pensions, but that gives rise to one or two questions. There was no real explanation or debate about the issue during the passage of the 2004 Act. As for the rationale, as my hon. Friend the Member for Fareham pointed out, it was rather slipped through.
So what, if it was not simplification, was the justification for extending the relief to pension term assurance?
What happened after 6 April 2006 to make the reforms in the Finance Act 2004 so unattractive and undesirable? We have had an answer from the Economic Secretary on that: the provision was used for non-pension purposes and for lump sum purposes. However, that begs the most important question, which my hon. Friend the Member for Fareham dwelt on: why was that not anticipated at the time?
One has to put that in the context of a number of cases. Yesterday, we debated the rate of corporation tax for small businesses. We have seen change after change: the introduction of a 10 per cent. band, then a zero per cent. band, which was abolished last year, and now the small business rate is increasing. That is an example of the Government introducing a policy and businesses altering their behaviour accordingly.
We have seen something similar with pension term assurance. Does it not worry Ministers that there often seems to be an almost systemic failure within the Treasury to anticipate the consequences of tax changes? Every year, a Finance Bill is presented and contains detailed provisions. The Treasury is keen to encourage certain types of behaviour and discourage others, yet it does not have a good record of judging what the consequences of the changes will be. This appears to be a very good example of that. Surely it could have been anticipated that pension term assurance would be used in the manner in which it has been. Within only a few months, the Treasury has been forced to change policy.
I am sure that the hon. Gentleman will remember the debates in the House over the issue of self-invested personal pensions, where it was regularly put to the Government by Opposition Members that SIPPs needed to be addressed—and subsequently they were. We debated that during the passage of last year's Finance Bill. Does he agree that, prior to the pre-Budget report announcement of action, no points were put in the House by any Opposition Members to the Government about the need to address term assurance at any stage? We have all agreed that action is necessary to protect the revenue base.
The hon. Gentleman may be right that those points were not made during the passage of the 2004 Finance Bill. One would have thought that the Treasury would be looking to spot those pratfalls. The Opposition do point out failures. I referred earlier to the zero per cent. band for corporation tax for small businesses, which was highlighted as a possible concern by Opposition MPs. There are times when things are not spotted by Opposition parties, but the hon. Gentleman will know—he was heavily involved in opposition—that our resources, compared with what is available to the Government and Treasury, are somewhat limited. He had access to a hotel room off Park lane, but those were perhaps the best facilities that any Opposition party has had. Often, one is talking about small numbers of people, but the Treasury is a mighty machine. It has the crème de la crème of the civil service working on these matters, yet constantly it seems to fail to spot some of them.
I would have thought that Ministers are concerned about that. There is certainly an example here of the Treasury not spotting the way in which a tax change would affect behaviour. That is not necessarily a party point, but it is a concern. I would have thought that Ministers ought to acknowledge that and be worried about it.
May I gently suggest to the hon. Gentleman that he is over-egging the pudding? Labour Members might take on board his point—although we might not agree with every particular of it—in respect of SIPPs or the incorporation issue when some individuals and organisations said at the time, “Do you realise that such-and-such a change could lead to such-and-such a consequence?” My somewhat hazy recollection from having served on the Finance Bill Standing Committee in 2004 is the same as that of the hon. Member for Fareham (Mr. Hoban): no one was making that point. The hon. Member for South-West Hertfordshire (Mr. Gauke) talks about resources in opposition, and I understand that point. However, any Member who has served on the Finance Bill Standing Committee, as he has, knows that members of that Committee get bombarded—quite properly in a democracy—with submissions from outside organisations, such as the Chartered Institute of Taxation, setting out their views on the proposed legislation. I stand to be corrected, but I do not think that there were any such submissions about this change in 2004, so it differs from the other two issues to which the hon. Gentleman has referred, which is why I suggest that he is over-egging the pudding.
I am grateful for that intervention. The hon. Gentleman and I have served on Finance Bill Committees before—he more often than me—and I think that it is fair to say that businesses that lose out as a consequence of tax changes tend to be the most vociferous in their lobbying of Committee members. The area under discussion was simplified by the Finance Act 2004, and it is unsurprising that there were relatively few contributions from industry as—I understand, because I was not a Member at the time—it generally welcomed the contents of the 2004 Act. That might explain why fewer submissions were made, but circumstances in which tax change measures favour industry are perhaps those where the Treasury ought to be most alert and most alive to the potential impact.
My hon. Friend makes an important point about the extent to which people advise us that specific changes will have adverse consequences. It is my understanding that the Treasury should have been aware of the take-up prior to A-day. Certainly the industry believes that that was discussed with the Treasury prior to A-day. Therefore, although it might not have been able to make any changes to the Finance Act 2004, it certainly could have done so in the Finance Act 2006 on which I served, along with the Economic Secretary and the hon. Member for Wolverhampton, South-West (Rob Marris). That might have been the forum in which to make such changes, because I understand that the Treasury was aware then of the issues we are discussing.
I am grateful to my hon. Friend for his comments, although I must say that, recalling the Finance Act 2006, I am not sure whether I can support the idea that an additional measure should have been included in it. On the contrary, perhaps we should be grateful that that did not happen. However, my hon. Friend makes an important point on the substance of the case.
I entirely understand my hon. Friend’s lamentation that on the whole one certainly does not look for additional items to be included in Government legislation; on the whole one searches for measures that can be deleted from it. However, I hope that my hon. Friend agrees that, whatever the complexity of Government proposals, that is no excuse for unintelligibility. As a parliamentary point, let me say that when the Government decide that a change is needed, it is important that wherever possible that should be stated in clear terms in the Bill in question. Is my hon. Friend concerned that the order-making power in schedule 18 allows for regulations, the content and detail of which we in this House might not see until some time after we have voted for the legislation? That will not do, it is not satisfactory, it happens under Governments of both colours and it ought to be changed.
My hon. Friend is a doughty defender of Parliament, for which we should be grateful, and he raises an important constitutional point about supervision. However, this Finance Bill, in contrast to last year’s, could do with more substance.
Let me turn to a couple of additional points, which I would like the Economic Secretary to address. What analysis has the Treasury conducted on who will lose as a consequence of this tax change? It seems that there are certain beneficiaries of the Finance Act 2004—the self-employed, contract workers and so on, who would not normally be able to participate in occupational pension schemes that provide some kind of life assurance lump sum. The purpose of the 2004 changes might have been to simplify the system and to make better provision for these people, but it seems that they have suffered as a consequence. I might be wrong, however, and I should be grateful for enlightenment from the Economic Secretary.
I should also be grateful if the Economic Secretary clarified the impact of the following development, which my hon. Friend the Member for Fareham addressed. My understanding is that before A-day—6 April 2006—tax relief was available for those individuals wanting to buy term assurance, if they were part of a pension plan that also provided pension benefits. As I understand it, that will no longer be the case, and I should be grateful—
From a sedentary position, the Economic Secretary gives a conclusive, authoritative nod. Term assurance is therefore more limited than it was before A-day, so this is almost more than a U-turn. We are not just going back to the position before A-day.
I turn to my final point.
I am afraid so. I have a final question for the Economic Secretary, on stability in the pension system, which my hon. Friend the Member for Fareham discussed in his conclusion. There have been a number of tax changes to the pension system. Has the Treasury analysed the impact of these frequent changes? Is the Economic Secretary concerned that such frequent changes increase instability? If there is an unstable environment—if people do not know where they will stand and what the tax system will be next year, or in two or three years’ time—it does not encourage them to save. We surely need to look at that issue. I appreciate that there are difficulties and that we need to get the system right, but such constant tinkering—the constant attempt to encourage a particular approach, only to discourage it on seeing its perhaps being overused—is characteristic, I am afraid, of the way the Treasury has been run in the past 10 years. Such tinkering is not necessarily good for stability, or to the long-term benefit of this country.
I am very grateful to my hon. Friend for giving way. The immediate impact on consumers of change after change should rightly preoccupy us, but there is another respect in which constant changes and growing levels of complexity are unhelpful: they tend to discourage market entry by smaller-scale providers. One can end up, even without having intended this consequence, with a lack of competitiveness and a concentration of power in the hands of a relatively small number of highly powerful operators, who tend to enjoy better access to Ministers. That does not necessarily conduce to the public interest.
My hon. Friend again makes a very important point. As is generally the case with financial services—and, indeed, in other areas—if we want to provide good products and services, competition is very important. Encouraging new entrants into the market and encouraging innovation is a very important part of any policy, but the level of complexity is making matters difficult for new entrants. It is not just a question of having the ear of the Government, but of the ability to pay legal and accountancy fees. As is often the case, I fear, too much complexity is causing us great difficulty.
However, I am straying from the clause under consideration, Sir Michael, and before I get into trouble I should like to conclude by reiterating that there are a number of questions that the clause raises, and I hope that the Economic Secretary will be able to answer them in his forthcoming speech.
I have three brief points to make. My hon. Friend the Member for Fareham (Mr. Hoban) was right to take this opportunity to chide the Government for their conduct of the issue of pension term assurance. He did so with considerable skill and took us back through the historical development—or lack of development—of Government policy on this matter.
When the then Financial Secretary—now the Secretary of State for Communities and Local Government—introduced the proposals for pension simplification and A-day in Committee on the Finance Act 2004, she also described her intentions. She said:
“Our proposals will create a transparent, consistent and flexible system that is readily understood.”
I am sure that we would all agree that had that happened, it would have been a sensible ambition. However, from what we have heard today, the then Financial Secretary, her advisers and the Treasury did not understand what they were introducing. Now, three years later, we have to use up four pages of the tax code in schedule 18 to undo the damage that was done in 2004. It is right, therefore, that we take this opportunity to remind Ministers, and the industry outside, of the way in which the Government have conducted affairs and the consequences of some of their policy implementation, which were not clearly understood at the time.
The then Financial Secretary also said that the proposals would
“make it easier for people to concentrate on things that matter, such as when and how much to save for their retirement, rather than on trying to understand anomalies between the different tax regimes.”––[Official Report, Finance Public Bill Committee, 8 June 2004; c. 427.]
However, the provision is now being scrapped as a perceived anomaly that favours a particular type of life assurance cover over another, and it was introduced by this Government.
The Association of British Insurers has not hesitated to point that out. It is perplexed that tax relief has been withdrawn from pension term assurance products, a market that the Government helped to create. It did not exist three years ago: it was the Government’s measures in 2004 that brought it about. As my hon. Friend said earlier, the industry was in discussion with Government officials about the product. In the run-up to A-day, the Government were well aware that the product was being developed, but they did nothing to discourage that.
My second point relates to the impact on policyholders. Research by Scottish Widows indicates that the households most at risk from this measure are not the wealthy, as suggested earlier, but those with an income above £20,000—so not the poorest, either—but with less than £30,000 in savings. They are middle Britain, and the people whom the Government should be encouraging to make provision for their retirement and unforeseen occurrences in their lives. Emma Walker from moneysupermarket.com has said that its research shows that some one in 10 life insurance customers have already made the switch from a conventional life insurance product to a pension term assurance product, so the change will affect a significant proportion of people.
My hon. Friend is making a valid point about whom the proposals will affect. However, does he agree that farming, where self-employment is rife, and the construction industry are among those sectors already hard hit by other economic factors that will be hit again by the proposed withdrawal of the measure?
My hon. Friend makes an excellent point. Clearly, some sectors will be affected more than others, in that they will have been the focus for the marketing undertaken by the insurance companies providing the products that we are debating. The people affected may well include farmers, in both his constituency and mine.
My final point has to do with the impact that the measure will have on the industry. The Government led the industry to develop these products: last September’s pre-Budget report gave a clue that adjustments were likely, but not even the Budget itself made it clear that the policy would be scrapped. My hon. Friend the Member for Fareham was right to say that the details were hidden in the small print of the Finance Bill published in April. If the proposal comes into law, it will deal a hammer blow to the products under discussion. They will be killed stone dead.
The industry has invested £35 million in developing the products, but we are led to believe that that money will be written off, as there will be no return on it at all if the proposals in the Bill are accepted. In addition, over the next 25 years the industry will have to manage the run-off of the 50,000 or so policies that have been taken out, as they cannot be cancelled or exchanged. Companies that had anticipated building up large portfolios of such business over a number of years are now looking at having to manage a small portfolio of less than critical mass over 25 years.
That will add a cost burden to the industry for many years to come, even though the Government just now are seeking co-operation and assistance from everyone in the life assurance and pensions industries who is involved in the promotion of lifetime savings. The Government want to work with the industry, as much more substantial pension plans will come through in other legislation, but they have dealt it a difficult blow.
I would not describe it as a body blow to the industry, as I do not want to exaggerate, but the industry has come to see that the Government who led it down a certain path three years ago have now moved to block that path. That has happened at a very unfortunate time in the Government’s relationship with the industry.
In my opening remarks, I set out the background to the Government’s decision taken at the time of the PBR and then the Budget. We have had an interesting debate, and I want to respond to a number of points that have arisen. I shall begin by putting the proposals in context, in terms of both principle and history. Much of the discussion has been about the process through which we reached the A-day reforms, and about their consequences, so some contextualisation is appropriate.
The hon. Member for Fareham (Mr. Hoban) talked about the Government’s principles, and almost got to the point of agreeing with them. I fear that the speeches of some other Opposition Members contradicted that approach, but that is by the by.
In a speech to the National Association of Pension Funds in March, I set out the principles that have guided, and continue to guide, the Government’s approach to pensions tax relief. I shall set them out again for the Committee. First, we believe that generous tax relief is provided to support pension saving where that produces an income in retirement. Pensions tax relief is not there to support pre-retirement income, nor to support accumulation or inheritance. Secondly, we believe that pensions should be provided with more favourable tax treatment compared to other forms of saving, in recognition of the fact that they are less flexible than other savings and that they are locked away until retirement. Thirdly, we believe that incentives for employer contributions should be provided, as it is more efficient for pensions to be provided on a collective basis through the employer, Finally, we consider that pensions tax incentives must be affordable and fall within current fiscal projections.
It is important to set out those principles again, as they have guided the Government’s decisions over recent months and years. They have also guided our approach to term assurance and pension term assurance, and I shall refer back to them during the course of my speech.
I also want to set out some history. In an intervention on the hon. Member for Fareham, I said that the Conservative Government of the day withdrew tax relief on life assurance premiums in the 1984 Finance Bill. The policy issues debated at the time were slightly different from those that pertain today, but I have read the debates and remain struck by the similarities and echoes between then and now.
In particular, it is clear that the Government of the day were concerned that the relief was being used for circumstances that were not intended. That meant that most of the relief was of no real benefit to the general body of taxpayers, and that any attempt to target the life assurance premium relief more precisely would be both potentially expensive and difficult. That was why the then Government decided that the only solution was to withdraw the tax relief altogether—a pragmatic solution that took account all the different factors.
The system left in place following the 1984 changes allowed relief, restricted to 5 per cent. of earnings, for contributions to a personal pension scheme for life insurance products. However, the term assurance market that was linked to pensions accounted for only a very small percentage of the overall term assurance market.
Does my hon. Friend recall that the 1984 abolition had an unintended consequence? I want to be generous to the Conservative Government of the time, but the consequence was that people getting mortgages stopped taking out the life assurance policies on which hitherto they had been able to get 15 per cent. tax relief, and piled into low-cost endowments that were widely mis-sold. This Government are still trying to sort out the mis-selling that was provoked as an unintended consequence of the Conservative Government’s change of tax rule on life insurance premiums.
I hear what my hon. Friend is saying. He is almost certainly correct, albeit somewhat partisan. I shall learn lessons from what he has said, but I am attempting to forge a consensus with the Opposition and so shall move on.
As I was saying, there was an earnings relief of 5 per cent., but the market remained very undeveloped. Essentially, term assurance is a pretty low-cost, high-volume sort of market, and the amount of tax relief available was not sufficient.
This Government reviewed the position at the end of the previous decade, as part of establishing an integrated tax regime for personal and stakeholder pensions. Consultations were held in September 1999 and February 2000, and the Government consistently made it clear that
“pension contributions are not a way of getting tax relief on various insurances that would not otherwise qualify for relief.”
The Government held that the primary aim of pension tax relief was to encourage saving in a pension. After the consultation of February 2000, the Government stated:
“Many respondents argued that it should be possible to include an element of life assurance cover within a pension. But they did not support the use of a flat rate limit… The Government has decided that life insurance can be included so long as it does not exceed 10 per cent. of the contributions paid.”
History shows that what had been a very small market before that decision became a negligible one, and that 10 per cent. of overall contributions was not sufficient to incentivise people to go into the pension-related term assurance market, given the nature of the business.
The Government embarked on a process of simplification, at each point making it clear that the goal was
“to encourage people to save in a pension”.
That was what drove our thinking. In the second pension simplification document of December 2003, we said that
“the Government wishes to ensure that pensions remain a vehicle for providing income in retirement…Pensions saving is to provide an income in retirement...It is not a route for conserving and passing on capital”.
That was the background to the debate on the 2004 Finance Bill, when the then Financial Secretary undertook the pensions simplification process. However, there was no reference in the legislation to pension term assurance—the expression did not exist at the time. The market for pensions-related term assurance was negligible at the time, and there was no intention to encourage a term-assurance market link to pensions, nor any discussion of such an intention during proceedings on the Finance Bill. There was a simplification of the pensions and tax regime to provide income in retirement.
There was some discussion between the industry and the Government as to whether the simplification would lead to the growth of a pension term assurance market and whether the changes in tax relief for pensions might lead to migration or churning in the term assurance market. However, there was no consensus for the view that the changes posed a material risk. Following discussions with industry players, the then Financial Secretary concluded that there was not a material risk that the changes we were making to tax relief for pensions retirement income would be likely to lead to a rapid growth in a pensions-related term assurance market.
Given the history of tax relief for life assurance, is the Economic Secretary surprised that his predecessor made that mistake?
We had an interesting debate on those matters earlier, when my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) referred to debates on past Finance Bills. In an intervention, I mentioned SIPPs. At the time, public debate and Members made it clear that there was concern that the SIPPs changes could have undesirable effects and the concerns were dealt with then. However, there was no discussion of the term assurance issue during the Finance Bill; it was never raised by Opposition Members and nor was it a subject of public debate. Technical discussions as to whether the changes posed a material risk concluded that they were not, and that the benefits of simplification outweighed the risk. It was not a mistake; it was a judgment that simplification benefits were more important than a risk that, at the time, was judged not to be material.
That was the position for the next two years and during the run-up to A-day. However, by September 2006 it became clear that although the products were completely within the law—they were not the means of tax avoidance—a substantial re-badging of the term assurance market was taking place. Many life companies did not sell the products as pension term assurance, which would have been a confusing label as they had nothing to do with pensions; they were about death benefit. The policies were often marketed as term assurance with tax relief—term assurance with the benefit of pension tax relief. In many cases, they were not marketed as pension tax relief.
I was asked for some figures. Before A-day the number of contracts sold that could be described as pension tax relief—term assurance linked to pensions—was in the low thousands; the number was negligible. In the fourth quarter of 2005, the number of mortgage-related term assurance contracts sold was 238,154. From the beginning of 2006, when almost no policies were being sold, the number rose to 58,046 products—from almost nothing to 20 per cent. of the term assurance market—whereas the number of mortgage-related term assurance products fell from about 238,000 to 190,161. What happened was perfectly understandable and, in retrospect, predictable: a substantial, tax-driven switch from mortgage-related term assurance to a term assurance that qualified for pension tax relief, but was often not marketed as such because it had no pension income. To my mind, and that of several Members, including perhaps the hon. Member for Fareham, that was not what we intended; our intention was not that pension tax relief should be used to sell what was, in essence, a non-pension product.
Last autumn, it was put to me that costs anticipated as negligible to the Exchequer were set to rise from about £25 million last year to about £160 million a year in five years’ time—as the hon. Member for Fareham pointed out. Over a five-year period there would be a cost to the Exchequer of slightly more than £500 million. That is £500 million of taxpayers’ money being spent on tax relief actions that people had previously taken without tax relief for, in essence, the same product—a non-pensions-related death benefit that some years before we, as a country, had decided not to tax-advantage. All our consultation documents made it clear that was not our intention and that was why we decided to act in the pre-Budget report.
The report made a clear statement that there was a substantial risk to the taxpayer, that the practice was outside our intentions and that the right thing was to address it with immediate effect. That is what we did. However, we did not say that there was necessarily an end to any link between pensions and term assurance. With the pensions industry, we wanted to find out whether we could establish an ongoing, meaningful link between term assurance policies and saving for a pension, which would not have disproportionate costs and would not mean that a large proportion of the tax relief was going to a death benefit rather than to pension saving.
We consulted the ABI, the Association of Independent Financial Advisers, the Society of Pension Consultants and the Investment and Life Assurance Group. The area is complex and we looked at several options: a test at the point of sale, to confirm that the policyholder was also a member of a relevant pension scheme; a cap on the total sum assured; a test at the point of claim; and ongoing sampling of policies by HMRC to check for fraud. Some in the industry, including the ABI, considered that some of the options might be workable, but after our consultation we found it impossible to set out a way forward that would be both commercially viable and consistent with our intentions and principles.
The problem was that the checks needed to make sure that term assurance, which is a high-volume low-margin product, was genuinely pension-related were disproportionate to the administrative costs that the industry could bear. A cap could work only if it was so high that there would be a death benefit rather than a pension income benefit. We would then have been forced to concede the sum of £500 million over five years. The people selling those products would have been willing for us to make that decision, but we felt that we could not do so because we could not justify expenditure of £500 million on what was largely a deadweight cost.
That is why we decided to bring tax relief back into line with our intentions and to make it clear that we could not see a way forward that was consistent with our principles. Some in the industry agreed with our approach. An expert at AEGON Scottish Equitable said:
“Although we understand the ABI’s position, we do not think”—
its proposals are—
“a workable solution for providers or for customers. At the very least, it will introduce a need for additional resource from providers, which will be met ultimately in adjusted costs for customers. Ultimately, it could mean providers withdrawing from the market.”
It was on that basis that we decided that we could not proceed.
The hon. Member for South-West Hertfordshire (Mr. Gauke) asked about losers—an issue also taken up in an intervention by the hon. Member for Ludlow (Mr. Dunne). The fact is that before A-day, the market barely existed: it was negligible. The market then grew very rapidly. Everyone who took advantage of it during that period is grandfathered—we are not withdrawing tax relief from anyone who took out products up to the time of the pre-Budget report, or, indeed, for a period afterwards when transitional arrangements applied. Our tax changes take us back to the position ex ante. There are no losers, though people who might have benefited from the more lax regime in future will not do so now because we have gone back to the status quo. As I have explained, I think that the right decision was taken.
I note that point, but has the Treasury done any analysis of the type of people who were taking advantage of the regime in the period after A-day and before the pre-Budget report announcements?
As I said, all the people who were taking advantage will have their benefits protected. It is not true to describe those people as either the very rich or tax avoiders. We are talking about people who previously took out mortgage-related term assurance or life assurance products and then benefited from the tax relief that came from the re-badging of those life assurance policies. It was never our intention—nor, in my view, the intention of the House—to tax advantage those life assurance policies. That is why we are returning to the status quo.
I am seeking clarification about whether a particular type of person benefited from that regime while it existed? For example, was it generally the self-employed or contractors who took out this sort of product in the relevant period?
No, I do not think so. Those who benefited were those who took out assurance policies such as life assurance. I pressed the hon. Member for Fareham to agree with me a number of times about that and eventually, on my fourth attempt, he did. Unless the Conservative party is willing to put up the £500 million to pay for an alternative proposal, I think that the hon. Gentleman and I are agreed that tax-advantaging life assurance products through pension tax relief is not the way forward. If so, we were right to sort out the problem at the earliest opportunity. We did so, despite the fact that in the period before we took our decision, we were not pressured by Opposition Members or anyone else to do so. As I said, we put transitional arrangements in place, which were widely communicated to the industry and, I think, welcomed by it as a way of sorting out the difficult pipeline cases. Indeed, we were praised by the ABI for so doing.
Will my hon. Friend tell the House how difficult he believes it would have been to sort out the loophole that was being exploited if we had adopted the Liberal Democrat policy of having a Finance Bill every two years instead of every year?
We would have had a considerably longer period between our decisive decision at the time of the pre-Budget report and the eventual enactment of the Finance Bill provisions, though our decision to act would not have been delayed because at that time the revenue risk was too great.
I am not going to say that there are no lessons to be learned from the experience. In retrospect, the Government could have been clearer about their intentions and I believe that both the Government and the insurance industry together could learn some lessons about the process involved in tax policy making. Indeed, I spoke earlier today to the director general of the ABI about how to learn such lessons for future tax policy.
In conclusion, the decision was taken in order to restore the Government’s intentions to protect the tax base and to ensure that what we set out to do and what the Finance Bill legislated for—to tax-advantage retirement saving—was, in fact, what happened. It was never our intention to tax-advantage assurance. I do not think that the hon. Member for Fareham is proposing so to do, but if he wants to stump up the £500 million necessary to oppose the clause, I will be very interested to find out how he is going to pay for it.
Question put, That the clause stand part of the Bill:—
Clause 67 ordered to stand part of the Bill.
Pensions schemes: abolition of relief for life assurance premium contributions etc
Amendment proposed: No. 6, in page 218, line 34, leave out ‘6th April’ and insert ‘1st August’.—[Ed Balls.]
With this it will be convenient to discuss Government amendments Nos. 7 to 9.
I welcome the transitional dates in the amendments in the name of the Chancellor of the Exchequer. The nationally known firm of independent financial advisers, Torquil Clark, is based in my constituency. Indeed, its office is about 100 m from my office and I know it quite well. In December I met people from that firm to discuss the announcement made in the pre-Budget report on the ending of tax relief on pension term assurance, and one of the things that they were concerned about was the suddenness of the transition. The amendments soften that somewhat, and they are welcome.
The hon. Member for Ludlow (Mr. Dunne) said that the transitional dates were not revealed until after this year’s Budget, and he referred to April, but in fact they were revealed on 21 March, in paragraphs 3 to 5 on page 47 of the Budget notes. I think that the Government are right to close the loophole, and that is why I have just voted in favour of clause 67, which will introduce schedule 18 if we agree to that schedule, as I expect we will. The amendments are helpful, as they set out the dates.
Government amendment No. 9 includes what I regard as a major drafting error: the sub-paragraph that it inserts starts with the word “But”, and it should not do so. I hope that on Report, the Government will remove the word. In addition, in the third line of the amendment, the verb “was” is used, but I think that the verb is conditional and should take the subjunctive form. It should therefore be “were”, not “was”, and I hope that the Government will look at that on Report. However, I welcome the amendments.
I am grateful for my hon. Friend’s contribution, which was detailed, incisive and informed, as always. As usual, he draws from the detail to make a wider point about the future direction of the country. On clause 67, I am grateful for his support for the intention behind the legislation. As he said, we consulted the industry in detail immediately after the pre-Budget report to make sure that we got the transitional arrangements right. It was put to me in our previous debate that the Government were slow in coming up with transitional arrangements; it was said that we did not do so until April. In fact, we had already come up with transitional pipeline arrangements, but the Association of British Insurers told us in April that some policies risked not getting the proper treatment because insurers had taken longer to process claims than they and the ABI had previously expected. That is why the amendments prolong the transitional period. I will reflect on the language issue; I will have to take advice on my hon. Friend’s question about the word “But”—[Hon. Members: “Why?”] Because I do not know the answer.
Just to add to the Minister’s confusion, I suggest that he look at the numbering, too, as the amendments will result in sub-paragraph (5A) coming after a (5)(b) and conflicting with another (5)(a).
I will reflect on all those points. Obviously, it is important to ensure that we get our As before our Bs, and that we use “but” correctly in this important legislation—which, as I said, will save £500 million over five years. However, Opposition Members have just voted against part of the legislation. I do not know where the shadow Chief Secretary to the Treasury or the shadow Chancellor were when that decision was made. We look forward to finding out where the shadow Chief Secretary will find the £500 million that she will need to pay for that decision. I fear that the right hon. Member for Wokingham (Mr. Redwood) will have to find further public spending cuts to make in his tax policy commission report, which we look forward to with avid interest, as he will not only have to fund his proposed tax cuts, but pay for a £500 million tax concession. We look forward to seeing those details, and I will reflect on the detail of the points raised. With that, I am happy to commend the amendments.
Amendment agreed to.
Amendments made: No. 7, in page 218, line 40, leave out ‘on or before 13th December 2006’ and insert ‘before the appropriate date’.
No. 8, in page 219, line 3, at end insert—
‘(4A) In sub-paragraph (4)(d) “the appropriate date” means—
(a) 13th April 2007 (in any case where, on the day of the making of the insurances in respect of which the policy of insurance was issued, the rights of the individual under the pension scheme included an actual or prospective entitlement to a pension), and
(b) 14th December 2006 (in any other case).’.
No. 9, in page 219, line 7, at end insert—
‘(5A) But where, on the day of the variation, the rights of the individual under the pension scheme included an actual or prospective entitlement to a pension, a relevant event does not occur by virtue of the variation if it was made in pursuance of a proposal made in writing (by whatever means) and received by or on behalf of the insurer before 13th April 2007.’.—[Ed Balls.]
Question proposed, That this schedule, as amended, be the Eighteenth schedule to the Bill.
I want to pick up on a point made earlier about the use of the reserve powers to make regulations in the schedule. That is a complex subject. The Committee is in agreement—or at least, Labour Members are—on the intention behind the Bill but we want to make sure that future changes do not inadvertently lead to problems, and that is why we will not hesitate to use the secondary powers. The hon. Member for Buckingham (John Bercow) expressed concerns, but if there is any question of those secondary, negative resolution powers being used, I will make sure that I, or my successors, inform Opposition Members in writing of our intention to use the powers in plenty of time, so that we can ensure full consultation and consideration of the matter, both in the House and outside. With that, I hope that we can agree to schedule 18.
I bear in mind the fact that we are in Committee, so I wish to make some more drafting suggestions to my hon. Friend the Economic Secretary. First, with the greatest respect to the right hon. Member for Wokingham (Mr. Redwood), he is wrong about what is now sub-paragraph (5A) of the schedule, as amended. If he looks at line 22 on page 218 of the Bill, he will see a reference to “paragraph 5”, which is not bracketed. If he then looks at line 7 of page 219, where sub-paragraph (5A) has been inserted by amendment No. 9, he will see that it follows sub-paragraph (5), and that is in brackets. He has miscounted, but he is right to be wary of the wording of the Bill. I suggest to my hon. Friend the Economic Secretary that the parliamentary drafting should not refer to “premiums” but to “premia”. “Premiums” occurs in lines 17, 20, 24, 28, 30, 31 and 39 of page 217 and in lines 2 and 20 of page 218.
My hon. Friend said that he would kindly look at the use of the word “But”, and that anathema and grammatical error also occurs in line 32 on page 217, in line 19 on page 218, and in line 20 on page 219. I urge the Treasury to have a word with its parliamentary draftspeople about the way in which the grammar of our language is used; after all, we are talking about statute.
The hon. Gentleman shouts that we should give my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) a job. I will reflect on the points raised. I do not want to get into the issue too deeply, but I am happy to consult Fowler’s “Dictionary of Modern English Usage” on the matters that have been mentioned. I do not know about the use of the words “premiums” and “premia”, but I know that Fowler allows people to go either way on the question of split infinitives, depending on their predisposition, and it may be that Fowler will tell us that some discretion is allowed on that point. However, I hesitate to dwell on those issues too long. Remembering last year’s Finance Bill, all I can say is that it was not our intention to make such mistakes. I await the Committee stage to find out the views of Mrs. Gauke on these matters.
Question put and agreed to.
Schedule 18, as amended, agreed to.
Rates of air passenger duty
I beg to move amendment No. 3, in page 8, line 22, leave out ‘1st February’ and insert ‘21st March’.
With this it will be convenient to discuss the following amendments:
No. 4, in page 8, line 23, leave out subsection (5).
No. 5, in page 8, line 27, leave out subsection (6).
Amendments Nos. 4 and 5 are consequential on amendment No. 3, because if the retrospective element is removed by amendment No. 3, the need for the remainder of the clause will be removed.
Today is the 10th anniversary of the winning back of the Christchurch constituency from the Liberal Democrats. I do not know whether it is a delightful irony or generosity of spirit that has resulted in the Liberal Democrat Front-Bench team supporting the amendment in my name today. It may indeed be both. I applaud the fact that the Liberal Democrats are prepared to come into the Lobby to support those of us who are concerned about the principle of retrospective taxation.
I have raised this matter on a number of occasions in the House. The first time was on 31 January on a point of order, on the eve of the implementation of the increase in taxes. As a result of Mr. Speaker’s statement then, I applied for an Adjournment debate, which took place on 20 February. During the debate the Financial Secretary said that I would be able to return to the subject during the Budget debate and the Committee stage of the Finance Bill. He is right. I have taken up those opportunities, because we still do not seem to have persuaded the Government that they are doing the wrong thing by imposing retrospective taxation. That is why I hope the amendment will be supported this evening.
That has been the view of all my right hon. and hon. Friends, and we have been involved in sending standard letters to our constituents, drafted with the support of our Front-Bench team. Those standard letters included the following words:
“I do share your concerns about the implementation of the Chancellor’s APD increases, particularly the retrospective aspect. I know that many individuals and companies have been hit by the increased duty being levied on holidays that were booked before the Chancellor’s announcement.”—
holidays that were not only booked but paid for before the Chancellor’s announcement—
“It seems clear to me that Gordon Brown did not properly think through the consequences of this bungled raid on the travel industry. Indeed, a legal opinion received by the Conservatives suggests that the Chancellor’s actions may even be illegal as it has not been approved by Parliament.”
I am informed that in the judicial review that has been initiated, the Government have until the end of this week to submit their response to that claim, and that it is likely to be heard before the end of July. So it was not an idle threat that their illegal act would be challenged. This is being followed up, no doubt at considerable expense, by the travel companies, which are especially outraged by what has happened.
It is a long-standing convention of the House that Budget resolutions are not retrospective. That is why the amendment is designed to change the starting date for the air passenger duty increase from 1 February to 21 March—a seven-week deferral. The reason I chose 21 March is that that was the date of the Budget. There was a Budget resolution on the matter, but prior to that there had been no opportunity for any Member of the House to vote on the increase in taxation. We now have the opportunity to vote on it again.
During the vote on Budget resolutions, six of my right hon. Friends and 14 of my hon. Friends voted against motion 13 because we were concerned about the retrospective nature of the matter and because we regarded it as a constitutional outrage. I know that some of my right hon. and hon. Friends were concerned that to vote against the whole motion was going too far. That is why the amendment focuses much more narrowly on the issue of retrospection, and simply changes the date by seven weeks.
Can my hon. Friend confirm that the amendments before us leave behind the generality of the debate? This is no longer a debate about air passenger duty itself. It is not about whether this is a permanent tax. It is about a one-off arrangement. It is focused narrowly on the abomination of imposing a tax before the Government have the authority of Parliament to do so.
My hon. Friend is right. I know that he would have been in the Lobby with us on 27 March had he been in the country, but he was away on overseas parliamentary business at that time. The amendment has been drafted so that it deals with the one-off period of seven weeks. It reflects the concerns shared by my right hon. Friend the Leader of the Opposition and my hon. Friend the shadow Chancellor of the Exchequer.
It may be immodest to recall that shortly after 31 January, when I raised my original point of order about the retrospective nature of the measure, I was having a sandwich lunch with my right hon. Friend the Leader of the Opposition, who congratulated me on the points that I had made and said that he very much shared my concern about the retrospective nature of the air passenger duty increase set out in the pre-Budget report and confirmed in the Bill.
I know that some of my colleagues are still worried about the cost of delaying the increase by seven weeks. It is a large cost in layman’s terms—about £100 million. That is an indication of the extent of this stealth tax introduced by the Chancellor of the Exchequer—a yield of about £100 million in seven weeks. Some of my colleagues are sensitive about supporting an amendment that could be misrepresented by the Government, who might say that we have a black hole in our calculations, and ask how we will manage to balance the books when we get into government if we have voted against the retrospective nature of the air passenger duty increase.
Can my hon. Friend confirm that my memory is correct—that when the extra tax was put on, we were told that it was nothing to do with general taxation or a black hole if it were not introduced? It was all to do with special measures that would be introduced in the future, which our amendment would simply delay by seven weeks.
My hon. Friend is right. We are talking about a seven-week delay. Once the measure is introduced it will continue for ever and a day, unless or until it is changed. I am sure that on clause stand part, and perhaps on the next set of amendments, we will have a chance to consider whether air passenger duty can properly be regarded as a green tax.
Let us put the £100 million cost of my amendment into context. It represents less than 0.02 per cent. of total annual public expenditure. That is £2 in every £10,000. Most people believe that about 40 per cent. of the money raised in taxes is wasted by the Government. As an Opposition, we are in the business of saying that we could save 0.02 per cent. of public expenditure in a year without any problems at all. Another way of looking at it would be to say that that £100 million is only 1 per cent. of the money being wasted on the new NHS computer system. We are not talking about an enormous black hole that the Government can use to intimidate us into not voting against retrospective taxation.
If somebody bought a ticket before 6 December, when the announcement was made, and was travelling after 21 March, the date that the amendment suggests, would they not still be caught by the retrospective changes to the tax system?
The hon. Lady is right; the amendment is limited. I considered tabling another amendment stating that clause 12 should not apply in respect of anybody who paid for and ordered their tickets before 6 December. She has referred to another mischief, which is one of the reasons a number of us are concerned about clause 12 in general. In a sense, that is a separate argument. It is a strand of the same retrospection issue, but speaking in strict parliamentary terms, I am talking about not increasing taxes on people in this country without allowing Parliament to vote on those increases.
Although the Government say that they have only one Budget a year, they are using the pre-Budget report as an opportunity to announce tax increases—in this case, a tax increase of £1 billion a year—so the Chancellor can come along on Budget day and say, “This is a neutral Budget.” That is exactly what he did this time, having conveniently forgotten that he had already announced a £1 billion tax increase in his pre-Budget report, for which he had not legislated or obtained parliamentary approval. The issue is important, and I am glad that there is concern among Conservative Front Benchers and in the wider House about retrospection.
I want briefly to examine the idea that the tax is somehow justifiable because it is “green” or “environmental”. I will not get into what I think is partly a semantic debate about whether this is a proper environmental tax—although in my view it is not. Even if it were an environmental tax, Conservative party policy, which has been announced by my hon. Friend the shadow Chancellor, is that we support green taxes, but only if they are offset by reductions in taxes elsewhere. The shadow Chancellor put it this way when he addressed the issue in an interview in “The World at One” on 1 February, following my point of order on the previous day:
“I think there is a case for green taxes and bringing in an aviation tax but they should be replacement taxes”.
That is not consistent with saying, “We can’t vote against any tax increases proposed by this Government.” We have said, as a matter of policy, that we will vote against tax increases, and particularly those that purport to be green tax increases, unless they are accompanied by offsetting reductions in tax.
The amendment is modest, and it does not go as far as some would wish, but it states the important principle, which we should stick to through thick and thin in this House, that we should not introduce retrospective taxation.
I oppose the amendment—and will vote against it if the hon. Member for Christchurch (Mr. Chope) presses it—for seven reasons.
First, the position adopted by Opposition Members—this particularly applies to the Liberal Democrats—is Augustinian. They want to be good, but not yet, so they will take any opportunity to push back the increase in tax. Secondly, the tax cannot be described as truly retrospective, when people had more than two months’ notice of the increase. Retrospection surely means increasing tax on things that people have already done. Thirdly, the practice adopted is not significantly different from the traditional practice with excise duties.
Why does the hon. Lady think that the last time the Government substantially raised APD, they gave a year’s notice of the rise?
I have no idea. I did not know that the Government gave a year’s notice last time. It was obviously not for the reason suggested by the hon. Member for Christchurch, because it would not take a year to go through the process that he is calling for.
Would the hon. Lady think it fair if the Government suddenly said that all the things that she had paid for over the past month would attract a special tax, which she had to pay although it had not been ratified by this House?
The right hon. Gentleman’s point is not significantly different from all sorts of taxes that we must pay. For example, the same applies to council tax—when the local council issues a bill, one does not have time to move house.
I will not give way, because some of the points being made by Opposition Members are wholly ridiculous.
Fourthly, Conservative Members have clearly forgotten the action that they took in February 1985, when they changed the tax treatment of gilts. When the decision was taken, the Bank of England said that it could not possibly trade in the gilts market if it knew that that tax change was forthcoming, so it could not possibly wait until the Budget. A press notice was issued at 7 o’clock in the morning, before the gilts market opened, so there were certainly no Budget resolutions on that occasion.
Trading in gilts is market-sensitive, whereas the introduction of a retrospective tax is not. The hon. Lady’s fourth argument does not hold very much water.
No, the hon. Gentleman is wrong. Either the principle is important or it is not. Tory Members who support the amendment have clearly forgotten that they used precisely the same procedure in February 1985.
Returning to the hon. Lady’s third argument, she mentioned council tax. An analogous example would be if someone were issued with a council tax bill, which they paid, but was then asked to pay more on top of it.
Fifthly, another key point is the behaviour of the airlines. The airlines frequently add charges, such as fuel surcharges and changes in airport taxes, after people have bought their tickets. They have protested about this measure, but their position is weak.
Sixthly, 1 February is an extremely sensible choice of date, because that is the point in the year when the fewest people are flying, which means that the fewest people will be inconvenienced. My final reason is that airlines frequently put on other charges after people have taken such decisions.
I wish to support the amendment. The hon. Member for Christchurch (Mr. Chope) was surprised that people might wish to support it on its merits rather than on the basis of their political alignments, but it seems perfectly sensible and I am happy to do so.
The hon. Member for Christchurch argued for the amendment primarily in terms of the principle of retrospectivity. It is fair to say that there is not a basic theology about retrospective taxation, which has happened in the past. Indeed, when my hon. Friend the Member for Falmouth and Camborne (Julia Goldsworthy) wrote to the Economic Secretary to ask him for examples, he came up with several, but they related primarily to anti-avoidance measures. Nobody would remotely suggest that the people turning up at an airport and being asked to pay a levy on their tickets are in any sense involved in tax avoidance. That is a completely different concept; the right hon. Member for Wokingham (Mr. Redwood) made the distinction earlier.
Two groups of people will be disadvantaged. The first comprises travellers who bought their tickets before 6 September without any awareness that this was going to happen and will travel after 1 February. There are many people in that category. They are not business travellers, who normally buy tickets fairly close to the point of departure, but people planning a family holiday, probably with a substantial cost involved. The other group comprises travel agents who have decided to carry the cost themselves because they have no alternative, or to avoid alienating their customers. Several travel agents have made that point to me.
Is the hon. Gentleman suggesting that those who purchase, long in advance, services or goods that they do not use or take possession of should always be able to avoid any increases in taxation on that good or service in the meantime, no matter how long a period is involved? That is the logic of his argument, is it not?
Of course, these are tickets that have been paid for in good faith. As I understand it, the purpose of this tax measure was to change people’s behaviour, but it is now being applied to decisions that have already been made. There is a basic lack of logic in the Government’s proposals.
The hon. Member for Bishop Auckland (Helen Goodman) made the reasonable point that a lot of money is at stake—£100 million or something of that order. Those who oppose the measure—Opposition parties, rebels or whoever—will be challenged on how they would fund the deficit. I do not have much of a problem with that, because our approach to aviation taxation is not that it should be tax-neutral. We believe—I do not know whether the hon. Member for Christchurch shares this view—that aviation taxation should be quite a lot higher to capture all the environmental externalities involved, and we have set out the case for that. Our proposals would raise substantially more revenue than the Government’s proposals, not less.
The amendment involves an important issue of principle that has been well expressed, and we are happy to support it.
I congratulate my hon. Friend the Member for Christchurch (Mr. Chope) on his principled approach to this difficult question, on the single-mindedness with which he has pursued his campaign for several months, and on his efforts throughout that time to draw to the attention of his colleagues in all parts of the House the importance of this issue.
The hon. Member for Bishop Auckland (Helen Goodman) is a distinguished Member of the House to whom I always listen with pleasure, but it did not sound as though she understood the concept of retrospectivity. She cited in defence of the Government’s proposals an occasion in 1985 of which I have no memory—although I do not dispute that it may have occurred in the way she describes—in which the Treasury announced at 7 o’clock in the morning that a new tax would apply thenceforth. That is not retrospectivity, because all the trades done after the market opened at 7 o’clock in the morning would be done in knowledge that a new tax then applied.
Retrospectivity is a very serious matter, and it is incorporated in a glaring or, I might say, an egregious fashion in the Government’s proposals. It occurs when a transaction is concluded between two or more citizens who believe that no tax applies, or a certain type of tax applies, and then find afterwards that a new tax is levied on them. It is exactly as if I had agreed today with the Financial Secretary to buy his tie for—what would it be worth? I suppose £5 or so—[Interruption.] No, that is unkind—I will make it £10 or so. I am not actually making him an offer, in case he is getting excited. It is as if I concluded with him today that I was going to buy his tie for £10, gave him the £10 and received the tie or was promised its delivery, and then we were suddenly told the next day, the next week, the next month or six months later that a new stamp duty or purchase tax was being imposed on ties and I had to come up with another £500 to give to the Treasury for having concluded the transaction with him some time before. That would be retrospectivity. I can see from the reaction on both sides of the House that we all think that that is a completely fantastical situation which, if it arose, would be utterly intolerable and unacceptable. However, it is precisely the situation that we face.
The hon. Gentleman makes my earlier point precisely. In his example, he takes possession of this hypothetical tie and would rightly feel aggrieved if there was a retrospective tax thereon. However, in the case of air passenger duty we are talking about advance payments for services—in this case, flights—that are not consumed at the point at which the tax bites. That is not retrospectivity.
It is indeed retrospectivity. The issue is whether the tax is known to apply by the parties involved when the transaction is concluded.
Of course I will give way to the hon. Lady in a moment if she will be kind enough to let me respond to her colleague.
This is a matter of justice. It is also a matter of economic risks. The great question is whether we have a country—a free country, I hope, in our case—and an economy in which people can conclude transactions knowing what the tax regime is at the time that they do so. It is enormously important for the economy, and for justice, that that should be the case. If there is any retrospectivity, neither of those conditions applies. When the transaction takes place, the parties involved need to know what are the costs, risks and benefits to all concerned. If the Government subsequently, in a way that those parties could not have anticipated, change the rules of the game—the costs, risks or benefits emerging from the transaction—they have acted retrospectively. That is unjustified morally and extremely dangerous economically.
The hon. Member for Christchurch placed emphasis on whether the Budget resolutions had been passed—I took that to be the thrust of his argument—but the hon. Gentleman seems to be arguing a completely different case and to think that that is not at all relevant.
It is a curious way to conduct a debate to try to refute an argument by saying that it is different from what was said by another person who took the same line but used different arguments in support of the same cause. That may well be the case, but I take my stand on the matter of retrospectivity. Such an important principle is at stake here that I will vote to defend it whether or not I am joined by the majority of my colleagues. We have heard some other good arguments. For example, the hon. Member for Twickenham (Dr. Cable) made some points of a practical character that tend in the same direction. The fact that there are other arguments from different sources that tend in the same direction hardly undermines my argument, which is based on the principle of retrospectivity.
The hon. Member for North-West Leicestershire (David Taylor) said that the point of consumption was the most important. However, if one buys a bottle of whisky before a Budget that increases duties on whisky, but does not open it until afterwards, one is not expected to pay an additional charge.
The hon. Lady is right and I thank her for that additional argument, which reinforces my case, as it was intended to do. The important point is the conditions that apply when the transaction is made. Transactions are irrevocable—one buys or one sells and, at that point, one must make a definitive calculation of the costs and gains. I repeat myself because I believe that the hon. Member for Bishop Auckland has some difficulty in grasping the notion of retrospectivity. If conditions are subsequently changed by a Government tax decision, which applies to the transaction, even though at the time no one could know that the change would occur, retrospectivity has clearly taken place.
If we vote for the amendment—and one never knows in a democratic Parliament how many colleagues will go through the same Lobby—we must act responsibly and accept that the consequence of voting for something is that it may pass into law. I recognise that, if that happens, the Government will lose revenue. I have not made the calculation but I take on board the figure of £100 million or £120 million, which is not insubstantial. I am always careful about voting for a measure that will cost the taxpayer £100 million to £120 million. Perhaps the phrase “cost the taxpayer” is a little unfair because the taxpayer had no more idea than anybody else that the Government were proposing the measure.
In every society that operates under the rule of law and in a market economy that is run on sound principles, the principle that there should be no retrospectivity is so important that establishing it is worth £100 million or £120 million. If the Government are defeated, that will convey a signal to them and subsequent Governments, who may be tempted by retrospectivity, that it is expensive because the House of Commons may rightly take a principled stand. Our predecessors for generations and centuries have upheld the principle that the House should not legislate retrospectively, whether for tax law or other laws. I leave aside the special circumstances of tax avoidance schemes.
We in our generation should uphold the principle that I have outlined. If the cost of doing that in the current circumstances is £100 million or thereabouts, I fear that it must be borne in the higher and longer-term national interest.
We are debating two principles this evening. First, the hon. Member for Christchurch (Mr. Chope) raised what might be called the constitutional principle. I understand that and I will be interested in the Government’s response.
Secondly, we are considering retrospection. I understand the principle that the hon. Member for Grantham and Stamford (Mr. Davies) enunciated. However, he has got it round his neck when he tried to give practical examples. That also applies to the hon. Member for Falmouth and Camborne (Julia Goldsworthy), with her ridiculous argument about consuming a bottle of whisky. They both fail to differentiate the purchase of a physical artefact—whether a tie, a bottle of whisky or a car—and the delivery of a service.
For example, if the hon. Member for Grantham and Stamford looks back, he will realise that, when the Conservative Government, contrary to their electoral promises, raised the VAT rate markedly, that higher rate covered services, which were delivered after the change in the VAT rate, even though the agreement for providing them was made before the increase.
The hon. Gentleman used the word “principle”. I hope that he agrees that a good principle remains good even if someone in the past has breached it. If some past Government or Government of a different complexion have breached it, that in no way negates or reduces its importance. Surely he does not seriously suggest that different tax rules—in the case that we are discussing, different rules relating to retrospectivity—should apply to goods and to services. He has a background in economics and he knows that there is no foundation for such a distinction in the science of economics.
Perhaps I am not making myself clear. I understand the principle that the hon. Gentleman outlines. I am trying to explain that there is no retrospectivity in air passenger duty. I understand the constitutional point—we will consider that shortly and the Financial Secretary will tackle it—but there is no retrospection in air passenger duty.
Although I have an A-level in economics, my background is in being a lawyer. I therefore know something about contracts. The tax is not to do with when the contract is made but, in the case of a service, which often entails delay, when the transaction is concluded through the delivery of the service. The example that the hon. Gentleman gave of the tie was a concluded deal and ownership had passed before the tax change had occurred.
The important point about air passenger duty is that the economics of the transaction will be changed subsequently. I am sure that the hon. Gentleman agrees that any transaction is based on a balance of cost and gain. Each party has costs and gains. In the example that I cited, the Financial Secretary lost his tie and gained some money. If the state subsequently changes the economics of a transaction, the equation would be different and one or other party to it would probably not have undertaken it if he or she had known what was coming. That is the essence of retrospectivity and the hon. Gentleman cannot deny that that is the result of the Government’s actions in the matter that we are discussing.
The hon. Gentleman says that I cannot deny it but I do.
As my pocket money probably would not have stretched to procuring any services when the change in VAT to which the hon. Gentleman referred was made, will he clarify whether people were liable for the increase regardless of whether they had paid for the services and of whether the contract to provide them had been agreed?
It happened when the service was performed. For example, if one engages a VAT-registered garden company and the VAT rate changes before the garden is done up, the higher rate has to be paid. It is not simply a matter of goods and services. The nature of the purchase of goods often means that ownership changes instantly whereas delivery of a service can be delayed.
My hon. Friend is making a typically well argued case. Does he agree that the point at issue, which is causing some confusion, is that the tax point in air passenger duty is that of departure, not of purchase?
My hon. Friend is as perspicacious as ever. If a service has been bought in October 2006 but is performed by an aircraft company in April 2007, there is a duty on departure when the service is performed—when the aircraft takes off with a passenger in it. There is therefore no retrospectivity in the provision.
I was merely going to intervene on the hon. Member for Wolverhampton, South-West (Rob Marris). I thought that his VAT example was good, but as his argument developed it became clear that it was not. Value added tax is payable when the service is paid for, and if that happens before the increase in the rate, no further payment is necessary. That is the difference between VAT and air passenger duty, for which, as the Financial Secretary said, the tax point is later. I simply wanted to make the point that VAT is not an adequate example and that the Government experience great difficulty in providing examples of similar retrospective legislation—
Order. May I clarify whether the hon. Gentleman is making an intervention or a speech?
I had finished speaking.
The hon. Member for South-West Hertfordshire (Mr. Gauke) is therefore making a speech.
I am grateful for your clarification, Mrs. Heal, of exactly what I am doing—[Interruption.] And I thank the hon. Member for South-East Cornwall (Mr. Breed) for his retrospective clarification.
The difficulty for the Government is that the examples that they have produced generally relate to cases of a market-sensitive nature, such as the example given by the hon. Member for Bishop Auckland (Helen Goodman). No doubt we shall hear other examples from the Minister later in which there has been a delay before parliamentary ratification, perhaps because of a general election, for example.
As I am now making a brief speech, I will ask the Financial Secretary to clarify one point. I remember that, immediately after the pre-Budget report, there were strong rumours floating around that the Chancellor had received strong advice from Treasury officials that this rise in air passenger duty could be attacked and that it might be illegal. It was also rumoured that the Chancellor had been advised to delay its implementation until after the Budget in March. No doubt there will at some point be a freedom of information request from The Times seeking details of the advice that the Chancellor received, but I should be grateful if we could short-cut the process so that we do not have to wait two or three years for the answer. Will the Financial Secretary confirm or deny that the Chancellor received strong advice that this retrospective legislation could prove vulnerable in the courts?
We are hearing the most extraordinarily convoluted legal arguments from the Government about why this measure is not retrospective, and why it is a good thing that people will have to pay this tax in spite of having paid for their tickets in advance of its imposition. Perhaps the House should think about the underlying realities of the people for whom we are legislating today. We know that it is the Government’s policy that only the rich should travel. Clause 12 is part of their policy that those on low incomes should be priced out of travelling by air. That is the purpose of the duty. Clearly it will not price the rich people on expense accounts at the front end of the aircraft out of travelling; it will price the poor out.
I see the hon. Lady disagreeing with me, but she should recognise that her Government wish to reduce the number of people travelling by air by taxing them, and that it will be the poor, not the rich, who get thrown out.
Surely the right hon. Gentleman can understand that the people in the top 25 per cent. of the income distribution take on average six return flights a year and that the people in the bottom 25 per cent. take on average one such flight a year. The benefit to the environment would be secured if those people on high incomes who take six flights reduced the number to, say, four. This would not reduce the opportunity for the rest of the population to go on their summer holiday.
The Conservative party is holding a consultation on this sensitive issue. One of the questions in the consultation asks whether there is a way of imposing taxes on air travel that would be less penal for those on low incomes, and that would get away from the obvious obstacle in clause 12. Perhaps even worse than the underlying reality of clause 12—which is its aim of taxing the poor out of planes—is that, although those people on low incomes have already bought their tickets and carefully calculated their family budgets, perhaps for a once-in-a-lifetime trip that they could not normally afford in other circumstances, the Government have suddenly come along and said, “We have bad news for you. All your family members have to pay this extra air passenger duty.” The fact that those people have already paid for their tickets and that that is a done deal has no impact on the Government; they are stony-hearted men and women, and they are going to impose the tax anyway.
I will be guided by my hon. Friends on the Front Bench, and I suspect that they will suggest that we let the Government get on with this, because the reality is that I do not think that my hon. Friend the Member for Christchurch (Mr. Chope) has enough people crowding around the Chamber to defeat the Government on this measure. Either the Government must change their hard heart, and their mind, and find another way to raise this £100 million, or those people will be badly damaged. I shall give the Government some free advice, as I often do. They could make themselves considerably more popular on the eve of the local elections if they cancelled this tax on people travelling around and paid for it by cancelling the identity card scheme. Indeed, if they did that, we would be able to have other tax reductions as well—
Order. We are not discussing the identity card scheme this evening.
I accept your advice, Mrs. Heal. I was illustrating that there are other ways of finding £100 million, and a lot more besides. We are discussing whether £100 million is absolutely essential to the future of the Government, and I was making the point that there are many popular ways for them to show that that £100 million is not essential to them.
My hon. Friends on the Front Bench are probably worried, because they have seen what the Government can do, about what would happen were they to recommend that we vote against the measure. It would be scored as £100 million that the Conservatives would not have when they come to power. The reality is completely different, however. We all know that the Government are going to take this £100 million tonight, and many more hundreds of millions of pounds through this tax in the run-up to the next general election.
Any sensible Government would accept the Opposition’s position, which is that, in due course, nearer to the election, we will set out our tax proposals for a future Conservative Budget, but I hope that that will not get in the way of our vigorously opposing measures such as these, which are mean-minded and unpleasant. I hope that the Minister will think again, but I am sure that he is not going to. He obviously believes in retrospectively taxing the poor.
Thank you for calling me to speak, Mrs. Heal, and I appreciate the ongoing guidance that I have received from you. I have four brief points to make on amendment No. 3 and the deferral of the air passenger duty increase. I use the term “increase” advisedly because, in respect of economy fares, the Chancellor has merely undone his own handiwork.
First, I want to make it clear that air passenger duty has nothing whatever to do with forestalling. I do not want to get too bogged down in procedural intricacies and precedents, but the precedent laid down by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) when he originally introduced air passenger duty was to give the industry several months in which to adapt to the duty and to any subsequent rises. As I understand it, however—perhaps my hon. Friend the Member for Christchurch (Mr. Chope) will correct me if I am wrong—amendment No. 3 seeks partly to preserve that precedent which, until the Chancellor scrapped it, helped to prevent a good deal of unnecessary confusion to airlines, tour operators and passengers alike.
My second point is that air passenger duty is not at risk of forestalling precisely because it does not really help to effect behavioural change. APD was introduced on a clear pretext: to raise revenue from an under-taxed industry. The reason for the curious timing of the APD increase that appeared in the pre-Budget report was equally clear: it was to raise £100 million of additional revenue. That was certainly the view of Robert Chote of the Institute for Fiscal Studies when he gave evidence to the Treasury Committee. He said:
“The fact that the Chancellor is in a tight position I think is clear...from the fact that he did not offset the rise in green taxation with a cut in other taxation, as he might have found appealing given the political debate”.
Martin Weale, also giving evidence, told me personally that APD
“is very much at the level where it is just an additional tax rather than really going at changing behaviour.”
Likewise, the Institute of Chartered Accountants was of the opinion that APD did not demonstrably change behaviour.
It took another three and a half months for the Treasury to concoct an explanation. When Mark Neale from the Treasury gave evidence on the Budget, he suddenly told me that
“the APD change came in quickly because there were pressing environmental reasons for bringing that change in quickly.”
I will not try to guess what those pressing environmental reasons were, but it remains my opinion that there were pressing economic reasons to grab the £100 million on offer from seven extra weeks of increased yield. What we need from the Chancellor now and in the future is a much clearer differentiation between taxation to change behaviour and taxation simply to raise revenue.
My third point concerns the anomaly that tour operators have faced regarding their ability to pass on the cost of increases to their customers, to which the hon. Member for Falmouth and Camborne (Julia Goldsworthy) referred earlier. I know that the matter is, embarrassingly, sub judice, and that the Financial Secretary gave some reassurance in February that he would have the Department of Trade and Industry consider reviewing the guidelines.
Has my hon. Friend seen that a consultation paper has been published today in relation to reviewing the guidelines? Having looked at that consultation paper, however, I can say that any expectations that he had that the problem would be solved will be dashed.
My hon. Friend beats me to my peroration, which, sadly, I will now have to leave aside.
I want to address, however, the damage that has been done to the reputation of environmental taxation by this debacle. The Treasury claimed that APD would save 1.1 million tonnes of CO2 annually, but it is left to the Environmental Audit Committee to remind us that that is a cut in projected growth, not a cut in absolute terms.
The Treasury has at no stage said that the APD change will lead to a saving of 1.1 million tonnes of carbon each year. Its direct impact will be to save 0.3 million tonnes of carbon a year, as I and the Treasury have consistently made clear. Given the savings on other greenhouse gas-causing emissions, which are not CO2, its overall impact will be to save about 750,000 tonnes of carbon a year by 2010. I hope that that helps that hon. Gentleman, and does not damage his case too much.
No, it does not damage the case. I appreciate the clarification, but it does not detract from my point that APD is effectively a blunt instrument to deal with the amount of CO2 being chucked out into the air.
Does my hon. Friend agree that were the proposal a green tax, no more would be paid for a full aeroplane than for an empty aeroplane? It is a simple fact—
Order. I am afraid that that intervention is not relevant to the debate.
I appreciate that guidance, Mrs. Heal, but I do concur with my right hon. Friend.
There is a legal challenge against APD on the grounds that it is not a proper environmental tax, with the result that the entire industry is feeling less inclined to be co-operative with the Government. There is a growing sense among the general public that APD—
Order. May I remind the hon. Gentleman of the amendment under discussion, which is not about environmental taxation? His remarks might be more suited to the clause stand part debate.
Again, I appreciate your guidance, Mrs. Heal, but my remarks were a precursor to my final point.
Lastly, there seems to be no intention that APD revenue, especially the extra £100 million stealthily—or perhaps not so stealthily—taken from airline passengers should be hypothecated to investment in the environment, such as building more flood defences.
To be entirely in order, the debate should be about the implementation date. The Minister has made an intervention, however, giving an estimate of the amount of carbon emissions that would be saved. Will my hon. Friend tell us what proportion of worldwide carbon emissions from aviation will be saved by varying the implementation date? I suspect that it would be infinitesimal.
Order. May I point out to the hon. Gentleman that the decision as to what is in order is entirely a matter for the Chair?
Thank you, Mrs. Heal.
As I was saying, the £100 million retrospective tax would be most beneficial if it could be hypothecated to building such things as more flood defences, which would be most welcome in my constituency, especially in the north end at Three Fields, in the south near the village of Coggeshall, and particularly in my own village of Bradwell.
You are policing the conduct of the debate as vigorously as ever, Mrs. Heal, which is entirely appropriate. Let me reassure you that I do not propose to be dragged away from considering the amendments of my hon. Friend the Member for Christchurch (Mr. Chope), either by the general debate about the clause or by the Liberal Democrat amendments, which we will deal with in due course. During the opening debate, I will confine my remarks to the amendments tabled by my hon. Friend.
I think that the record will reflect that, essentially, the hon. Member for Bishop Auckland (Helen Goodman) said that my hon. Friend was looking around for reasons to oppose the APD rise and had picked on the issue of retrospectivity as a kind of fig leaf. That is unfair to him: he has obtained an Adjournment debate on the subject, has campaigned persistently on the issue—I have had dealings with him on it—and takes the constitutional aspects of the business extremely seriously. Therefore, I had better have my wits about me in dealing with his amendments.
Although Conservative Front-Bench believe that the retrospective nature of the rise is dubious at least, are sympathetic to the intention behind the amendments tabled by my hon. Friend and fully share his concern about the principles of retrospectivity involved, we part company with him to some degree on the likely effect of the amendments if implemented, and cannot support them if he presses them to a vote. I hope to have something reassuring to say to him later, but in the meantime I shall examine in detail the points about retrospection.
As the hon. Member for Twickenham (Dr. Cable) said, these matters involve a certain amount of theology, and the whole question of whether the Chancellor, Treasury and Financial Secretary have acted retrospectively in relation to the clause has been closely considered, not least by the Treasury Committee, of which my hon. Friends the Members for Braintree (Mr. Newmark) and for South-West Hertfordshire (Mr. Gauke) are members. What it has said deserves some airing, because there has not yet been an opportunity to do so.
If we review the history of the doubling of APD, we see that it is not altogether a happy story. The last significant rise, as I pointed out to the hon. Member for Bishop Auckland, was announced in March 2000 and implemented in April 2001. At that time, therefore, Ministers gave roughly a year’s notice of the rise. They helpfully explained at the time that the delay
“would allow airlines and tour operators plenty of time to adjust their marketing and pricing strategies to the new structure.”
That was only a few years ago.
By contrast, the current rise was announced on 6 December last year, in the pre-Budget report, for implementation on 1 February this year—not a year’s notice or even six months’ notice, but less than two months’ notice. There was no question this time, then, of allowing airlines, tour operators and especially passengers “plenty of time” to adjust. Indeed, those passengers who had already bought tickets dated after 1 February, and to whom price rises were passed on, were given, as my hon. Friend the Member for Christchurch said, no time to adjust.
The Treasury Committee elegantly described that as the “first element of retrospection” of the rise that the clause seeks to bring into effect. We are therefore bound to ask the Financial Secretary: why the rush? Why did Ministers give a year’s notice of the last significant rise in APD, but less than two months’ notice of this one? I think that we know the answer, to which my hon. Friend the Member for Braintree alluded in relation to the evidence heard by the Treasury Committee. The Chancellor was not, it seems, overcome by an urgent desire to hurry through a reduction in emissions by the means of APD, but simply grabbing the first instrument to hand to help him to pay off the £153 billion that he plans to borrow over the next five years.
There are more questions. For instance, what estimate has the Treasury made of the number of passengers who paid the new rates of APD on tickets dated after 1 February, when many airlines—as the Treasury will have anticipated—pass the cost of the rise to passengers, and what estimate has it made of the cost to those passengers? How much will they pay in total? Can the Minister confirm that the Federation of Tour Operators has issued judicial review proceedings against the Chancellor in relation to the rise, that the Government have acknowledged the service of the claim, that a judge has directed that they must serve their defence by this Friday, and that the court has directed that the case be heard quickly with the intention that judgment may be given by the end of July?
I mentioned a moment ago that the Treasury Committee had described this manoeuvre as the “first element of retrospection”. This takes us to what it described as the “second element of retrospection”. It observed that
“the liability to pay Air Passenger Duty at the new higher rates will effectively be incurred before the House of Commons has authorised the increase”.
The Committee concluded—I consider this an important section of what it said on the subject—
“As a general rule, we consider that, where increases in rates of duties or taxes are proposed in the Pre-Budget Report, those increases should not come into force until after the House of Commons has had an opportunity to come to a formal decision on the proposed increase following the Budget. We draw the attention of the House of Commons to the unusual timing of the implementation of the increases in Air Passenger Duty, for which the Treasury has not cited any relevant precedents.”
That carefully crafted reproof—I do not know why the Financial Secretary is wincing; I am merely reading what the Select Committee had to say—suggests that any precedent cited by the Treasury was not relevant.
The Financial Secretary is on record as citing two specific precedents: the supplementary charge on North sea oil announced in the 2005 pre-Budget report, which was introduced with effect for accounting periods from 1 January 2006, and the increase in fuel duty announced in the 2006 pre-Budget report and implemented from midnight. My recollection is that he cited both those precedents during the debate initiated by my hon. Friend the Member for Christchurch on 27 February. Unfortunately, both those precedents look a little dubious. As the House of Commons Library points out,
“It is arguable that these examples do not provide a precedent that captures all the aspects of the rise in APD rates: for example, the amount of time between the implementation date, and the date the House formally approved the measure (i.e.: that it was a matter of weeks, not days); the nature of the tax change (that it was an increase in tax rates. Not just a tax continuation), and the fact that projected receipts from the change would not have been significantly affected by a delay in the implementation date (either from taxpayers taking account of the announcement, or external factors affecting the yield from the levy).”
In other words—this touches on a point raised earlier by the hon. Member for Falmouth and Camborne (Julia Goldsworthy)—consumers have not usually pre-booked the fuel, or the alcohol or tobacco, that they consume immediately after a budget or pre-Budget report rise in duty on those products. The North sea oil supplementary charge was essentially driven by a strong surge in oil prices, and was implemented immediately to prevent forestalling—the practice of taking advantage of any implementation delay to amend tax planning strategies. As the Library puts it,
“this type of calculation would not be relevant in setting the rates of an airport departure tax”.
The least well-off tend to book their flights much further in advance, because the earlier a booking is made, the better the deals available. On that basis alone, will those people not be disproportionately affected?
My hon. Friend makes a fair point.
My hon. Friend the Member for Chipping Barnet (Mrs. Villiers), the shadow Chief Secretary, has received a letter from the Financial Secretary citing further precedents. We want to examine those, because the Library note on the other precedents that he cited is extremely interesting.
That brings me directly to the amendments tabled by my hon. Friend the Member for Christchurch—
May I say at this point that my hon. Friend is making such an elegant case against the Government that he has persuaded me to vote for the amendments?
I was waiting for someone to make that point. I am only surprised that my hon. Friend needed persuading to vote for them. Evidently I have not entirely mastered his psychology: I must pay more attention in future.
I entirely agree with my hon. Friend the Member for Christchurch that the way in which the APD rise has been implemented has been—as the Library note confirms— legally and procedurally dubious, to say the least. But I doubt that the Financial Secretary will spring to his feet tonight to announce that the Chancellor has accepted the Select Committee’s reproof and to guarantee that his successor will not implement a tax increase in this way in future without consulting the House first.
Given the serious legal proceedings that the Government have had to accept, were they to lose the case presumably it would cost us even more money as taxpayers, because they would have to refund all the money and go to enormous administrative expense to sort out the mess. If the Government gave in on the amendments, they might do all of us a favour by saving us money in the event of defeat in the courts.
My right hon. Friend makes a fair point. A sword of Damocles is hanging over the Government. I do not think that the House of Commons is the right place in which to decide what change is legally in order and what is not, but it may well be that the Government have been as careless about the legal aspects as they appear to have been with the procedure.
Where I part company with my hon. Friend, to an extent, is over his belief that passengers who purchased tickets between 1 February and Budget day, 23 March, and who have consequently had part or all of the Chancellor's APD rise passed on to them by the airlines, are likely to be reimbursed by them if his amendments are passed. This is a crucial point. Part of the debate has been conducted almost on the assumption that APD is paid directly by passengers, but in fact it is paid by the airlines. It is hard to see how the amendment would not simply result in a windfall for the airlines—a windfall of some £100 million, according to our calculations and my hon. Friend.
I think my hon. Friend has misunderstood my amendment. It would not give relief only to passengers who had purchased tickets between 1 February and 21 March; it would give relief to all passengers who had purchased tickets for travel between those dates, regardless of when they had purchased them. Some might have purchased them many months earlier.
The key point, though, is that it would give relief to the airlines, because the airlines, not the passengers, pay the duty. One of my reasons for asking the Financial Secretary earlier how much of the increase had been passed on to passengers was the genuine uncertainty that exists on this point. We fear that as a result of the amendment the airlines might simply receive the windfall, say “Thank you very much” to the Treasury, and not pass on the £100 million to the passengers.
My hon. Friend seems to be arguing that the genie can somehow be compressed and put back in the bottle. We are not convinced that the damage caused to passengers by the companies that chose to pass on the retrospective rise can be addressed by the amendment, but we are certainly not happy to leave the matter there. Although we cannot support my hon. Friend if he insists on pressing his amendment to a vote, we intend to table a new clause at a later stage that will prevent the Chancellor's successor from behaving in the same way in relation to APD. I hope that it will have the support of my hon. Friend as well as that of other Members.
In conclusion, this retrospective rise should not have happened. As my right hon. Friend said, it may be found to be illegal by the courts. However, it is genuinely difficult at this stage to correct the effects on passengers of a change in duty that has already come into effect—to put the genie back into the bottle or, groping for another cliché, to lock the stable door after the horse has bolted. However, as I say, we intend to table a new clause to prevent the Chancellor’s successor from carrying out such a retrospective manoeuvre again.
I think that this has been quite a good debate. All the contributions, with the exception of that by the hon. Member for Wycombe (Mr. Goodman), have been clear. His was extraordinarily convoluted. It twisted and turned. I appreciate his position and look forward to any substantive contribution that he may make to the debate on air passenger duty at subsequent stages of the Bill.
The Minister finds me convoluted. May I simply ask him a straightforward question? Does he agree with the Treasury Committee that he has not cited any relevant precedents for this retrospective increase?
The hon. Gentleman said himself that he wants to study the letter that I have sent to the hon. Member for Chipping Barnet (Mrs. Villiers), with a whole list of precedents, which I will mention in a moment. Clearly, they are relevant and he wishes to study them. The Treasury Committee did not have access to that information when it came to its conclusions and published its report.
Will the Minister give way?
I will, although I want to deal with some of the points that those who have contributed have made to the debate.
Why did not the Treasury Committee have access to the precedents?
The information before the Treasury Committee did not include the information that I was able to set out, first, to the Chairman of the Procedure Committee and then to Conservative and Liberal Democrat Front Benchers who lead on the subject.
I am a member of the Treasury Committee. We hold a number of hearings after a pre-Budget report. There was plenty of opportunity for the Government to cite precedents that we might have considered to be relevant, but the Government did not take that opportunity. Can the Minister explain why?
For the purposes of this debate, there are a number of precedents that I wish to cite. I set them out in some detail to the Chairman of the Procedure Committee, to which I will refer, to Conservative Front Benchers and to the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who speaks for the Liberal Democrats on the matter. What is clear is that aviation currently is responsible for nearly 6 per cent. of the United Kingdom’s carbon dioxide emissions, but that figure is rising and aviation is also responsible for other non-carbon dioxide emissions that contribute to climate change. Very few contest the case that that under-taxed industry should at least cover the climate change costs that it imposes, and very few contest that action is necessary to encourage aviation to reduce the climate change impact.
While the Government continue to push and have led the arguments for aviation to be included in the European Union emissions trading scheme, which we view as the best, most effective and most efficient policy instrument available, it is right to look at what can be done domestically with the policy tools at our disposal at this point. That is what we said in the air transport White Paper in 2003, in the Budgets in 2004, 2005 and 2006 and in the energy review in 2006.
If that is so, can the Minister confirm today that, when the European emissions trading scheme comes into place, air passenger duty will be abolished, because that was a pledge that his ministerial colleague was unable to give the European Committee the other day?
Order. I wonder whether I could ask the Minister to move on quickly to the amendments currently under discussion. Perhaps the comments made would be more appropriate in the debate on clause stand part.
Of course I will, Mrs. Heal. It has been a wide-ranging debate to date. Let me return to the question of the air passenger duty and the proposals of the hon. Member for Christchurch (Mr. Chope).
To be clear, air passenger duty is a tax on airlines, payable by airlines. It is charged per passenger at the point of departure from UK airports, so it is a departures tax. It is not a ticket tax, not a booking tax, not a purchase tax. Again, the tax point is the point of departure by the passenger from the UK airport, not the point of purchase of the flight ticket. That is just as it was in 1994 when the APD was introduced by the previous Government and it is just as it has been for every change since.
Can the Minister tell us how much of the extra duty has been charged directly to the customers who had already bought their tickets, and how many airlines have put surcharges on all subsequent ticket sales?
I cannot precisely, because clearly that is a commercial arrangement between the airlines and their passengers, but, for example, Ryanair e-mailed its customers who had pre-booked and direct debited the increase in the air passenger duty from those accounts. BMI and British Airways waived the increase and absorbed the costs. There was a variety of different responses from different commercial operators. The right hon. Gentleman would appreciate that that is properly a commercial matter for those companies in relation to their customers.
Further to what my right hon. Friend the Member for Wokingham (Mr. Redwood) has said, the Minister has just said that the money is to be used to deal with the damage created by CO2. Therefore, I would like to ask him a specific question: how much of the £100 million that is being raised will be used to deal with the damage that CO2 has created?
The Chancellor was clear in his pre-Budget statement and I have made the position clear since then in different debates and in Select Committee inquiries. The rise in the air passenger duty will contribute to the increase in spending that we are looking to be able to deploy to some of our priorities, including, specifically, transport and environmental protection. This may interest the hon. Gentleman. He mentions £100 million, but in 2005-06, as the public expenditure statistical analysis confirms, we spent as a Government £8.4 billion on environmental protection. He may have seen yesterday that we published the new PESA outturn estimates. For 2006-07, the spending on environmental protection was £9.7 billion.
Mr. Illsley, I welcome you to the Chair and to this debate. The intention to introduce this legislation to Parliament was announced to Parliament in the pre-Budget report on 6 December and the change has effect for all flights departing after 1 February 2007.
I pay tribute to the hon. Member for Christchurch. As members of the Committee recognise, he has been dogged in his pursuit of the issue. He raised it on a point of order, in an Adjournment debate with me, in a debate on the Budget resolutions, although none of the others from his party who have signed his amendment did so, and of course he has raised the matter today. The decision that we have taken, the move that we have made and the provision in the Bill is not an illegal act, as he asserts. We will mount a strong defence in the case that the Federation of Tour Operators is bringing to the courts. I am confident that our arguments will carry the day.
The hon. Gentleman advanced three arguments. Let me contest each and every one of them. The measure is not retrospective; it is not out of step with established parliamentary procedure; and it is not a measure going through the House without parliamentary scrutiny and debate. I will take those in reverse order.
On the issue of proper debate and scrutiny in Parliament, after the pre-Budget report statement on 6 December, Treasury officials and the Chancellor gave evidence to the Treasury Committee on 12 and 13 December; I gave evidence to the Environmental Audit Committee on 31 January; I gave evidence to the Treasury Committee on 7 February; I wrote to the Chair of the Procedure Committee on 27 March; I answered an oral question in this Chamber in January and I answered the hon. Gentleman's Adjournment debate in February. Finally, the House had the opportunity to debate the resolution over four days following the Budget, before the taxpayers concerned had to pay out any of the increased sums for which they were liable. At the end of those four days of debate on the Budget resolutions, the House voted on the proposals for APD announced in the pre-Budget report. The vote was carried by 296 to 84—and I must say that the Whip, my right hon. Friend the Member for Rutherglen and Hamilton, West (Mr. McAvoy), would welcome a majority of 212 on several other issues that face us. We are also now having scrutiny and debate as part of our consideration of this Finance Bill. Therefore, the first assertion is not founded.
The second argument related to parliamentary precedent. In announcing and putting forward the provisions for the rise in APD, we have used provisions under the Provisional Collection of Taxes Act 1968. We followed established procedure that has been used on a number of occasions by this Government and previous Governments. I confirmed that to the Chairman of the Procedure Committee in March. I understand that that Committee has neither considered nor reported my letter, and I therefore wrote separately to the hon. Members for Chipping Barnet and for Falmouth and Camborne to make many of the same points as were made in the letter.
I wish to quote a couple of passages from that letter. The hon. Member for Twickenham (Dr. Cable) is right that some of the precedents relate to anti-avoidance, but by no means do all of them:
“Others include, for example, the resolution to charge income tax for the 2002-2003 financial year…at the specified rates.”
An older precedent mentioned was the petroleum revenue tax:
“In August 1978, the Government announced a package of changes to the tax, including an increase in the rate to 60 per cent. from 1 January 1979. The measure was not enacted until the post-election 1979 Finance Bill…These precedents are in addition to the one I cited in the House of the North Sea Oil taxation measures”
—the increase in the supplementary charge—
“announced in the 2005 Pre-Budget Report”
and implemented from 1 January 2006. Therefore, it is clear that established parliamentary conventions and procedures are not being broken.
Finally, let me turn to the third argument on retrospection. My hon. Friends the Members for Bishop Auckland (Helen Goodman), for North-West Leicestershire (David Taylor) and for Wolverhampton, South-West (Rob Marris) understood the point to do with this clearly, although a number of other contributors did not. I must say to the right hon. Member for Wokingham (Mr. Redwood) that the arguments are not at all convoluted; they are straightforward. Far from being retrospective, this tax change was pre-announced. The pre-Budget report documents made it clear that the new rates would apply to passengers departing the UK from 1 February. I accept that there is an issue in respect of those passengers who pre-booked before the pre-Budget report of 6 December, but the airlines had almost two months to deal with that. I say to the hon. Member for Wycombe that they are the liable parties. The airlines are responsible for payment: the airlines choose, and have chosen, whether to levy the APD increase on their passengers or to absorb the costs.
Let me repeat that the distinction is principally to do not with goods and services, but with the point of tax. The point of tax is when a flight takes off, not when it is booked. All previous changes to APD have applied to both flights that were already booked at the time of announcement and to flights booked subsequently. That did not make those changes retrospective. How or whether to pass on the cost of the tax is a commercial matter for airlines. It is a matter to do with their pricing policy, their judgment and the terms and conditions of their ticket sales.
This is a theological argument about dancing on the head of a pin. What about the public? They have no choice. It does not matter whether Ryanair keeps the money or gives it back. The Government can blame it or not. What about the public? What about somebody who has pre-booked his ticket and is now surcharged? Do such people not have any rights?
It is not a theological argument. It is a principled argument that is based on legislative and parliamentary precedent. For the hon. Gentleman’s benefit, let me add that because APD is a tax on airlines and not passengers, if a flight that is booked is cancelled or not taken, no APD is liable. Whether an airline then repays to the customer the equivalent sums of the APD that they have already taken is a matter for the airlines, and a question to do with their terms and conditions. I and many other Members have had experience of constituents who have found it difficult to get that APD repaid when they have not taken flights that they have booked and paid for.
Many airline passengers are aware that the actual price of the service that they are buying is more likely to vary upwards than downwards and that it is more likely to do so the longer the interval between when they book and when they fly, because of fuel surcharges which are commonly added in by many airlines. Therefore, passengers are aware that prices can change.
It is also frequently the case that people or organisations make decisions on investments, purchases or pricing without having full knowledge of how the tax position may change.
I wish to emphasise that following the pre-Budget report I and officials at the Treasury and Her Majesty’s Revenue and Customs held many meetings with those affected by the change, including representatives of airlines, travel agents and tour operators. During those discussions, I was able to clarify a couple of points to them, on which I wish to update the House.
The hon. Member for Braintree (Mr. Newmark) raised an issue to do with package travel regulations. Scheduled airlines were generally able to pass on the cost of APD if they wished—although some, of which I have cited two, chose not to do so. We recognise that tour operators, who account for about 15 per cent. of the flights on which APD is charged, are restricted by the Package Travel Regulations 1992 from passing on increased costs to customers. The European Commission is planning a review of the directive from which the regulations stem. We believe that it should be fundamental and wide-ranging. We expect the EC soon to issue a discussion document setting out options for the review, and my right hon. Friend the Minister for Trade, Investment and Foreign Affairs has today written to the commissioner for consumer affairs underlining the importance that we place on the review of the directive and urging that any review should be wide-ranging and fundamental.
The next point relates to how APD is currently defined in terms of classes of travel; I think that the hon. Member for Christchurch referred to the consultation on this earlier. The aviation and tour operator industries have raised with me concerns about the current structure of APD, which has not changed since it was introduced more than 10 years ago, and in particular in relation to the treatment of seats on business-only flights or seats marked as premium economy. Following initial meetings with the industry, we announced in the Budget that we were open to reviewing the issue, given that the current structure might not send appropriate environmental signals and might cause market distortions. I can confirm today that HMRC has issued a consultation document seeking further information on possible options for change. I have placed a copy of that in the Library and it is also on the website.
In summary, the amendment would cost the Government £140 million—not £100 million, as the hon. Member for Christchurch suggests. The arguments that he mounts that this is a move without parliamentary precedent and without legal basis, that it is retrospective and that it has not been subjected to parliamentary scrutiny and debate are all wrong. I hope that I have been able to demonstrate that. I hope that he will not press his amendment to a Division. If he does, I shall have to ask my hon. Friends to oppose it.
I am grateful to the Financial Secretary for his response and for his comments about the package tour regulations, but I do not understand why the Government did not take account of them when they decided to double air passenger duty. Back in 1993, when those regulations were in place, my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), the then Chancellor, introduced the concept of air passenger duty in his November autumn statement. He admitted that he did so because, unlike the present Chancellor, he was in need of extra money at the time. He was brave enough to say that, instead of trying to cover up the situation as some sort of environmental good thing.
My right hon. and learned Friend did not implement the tax, however, until 1 November 1994. He delayed implementing it not because he could afford to do so—he needed the money—but because he took the view that it would be inequitable to implement it earlier. My noble Friend Lord Cope of Berkeley, the then Paymaster General, told this House:
“It would be unreasonable to expect tour operators to take the theoretical possibility of new taxes into account”—[Official Report, 31 January 1994; Vol. 236, c. 643.]
For that reason, there was a very long lead-in period. The then Government knew about the position of tour operators, which has not changed under subsequent package tour regulations. Why, therefore, did this Government not take the same view this time? That is why they find themselves in the courts, and why the Financial Secretary is desperately exchanging notes with the European Commission before Friday, when he has to hand in to the High Court his submission in answer to the judicial review. I am therefore not convinced by that part of the Government’s argument.
The Treasury must have known about this measure at the time of last year’s pre-Budget report. It must have decided that, irrespective of the situation, it would proceed and impose a tax that will result in tour operators being charged £44 million, which they will not be able to recover from their customers. That is a windfall tax on tour operators—a point that needs to be taken into account when bearing in mind what my hon. Friend the Member for Wycombe (Mr. Goodman) said about the consequences of accepting my amendment.
I was also concerned at the Financial Secretary’s saying that he was playing the situation by the book. He gave a technical, carefully worded response, saying that this duty was not retrospective because under the terms of clause 12, all the taxpayers concerned will not have to pay out any sums incurred before the Budget. He means by that not our constituents—the people who will pay these extra charges in order to travel by air—but the airlines. He implied in that careful use of language that because, technically speaking, the taxpayer in this case is the airline concerned, rather than the customer of that airline, the duty is not retrospective. That is disingenuous beyond belief. Constituents who booked before 6 December holidays and flights taking place after 1 February, and who were charged a surcharge when they got to the airport, have written to me about this issue.
If my amendment were carried, it would alleviate the burden in respect of the period between 1 February and 21 March and would provide extremely welcome relief to many passengers. It would not deal with those passengers who pre-booked their summer holidays, but it would provide relief for all those who booked in advance for their spring or half-term holidays, including most skiing holidays. As a matter of interest, I would probably be able to claim back money in respect of a foreign exchange to France by my son, who went to improve his French. That is not a significant issue; however, many other people would be in the same position if the amendment were carried.
I thank my hon. Friend the Member for Wycombe for his courtesy; he powerfully reinforced the case that I was making for the amendment. My hon. Friend the Member for Gainsborough (Mr. Leigh) said that he was persuaded by his argument. It was only in the last few moments that my hon. Friend the Member for Wycombe poured cold water on the whole proposition. He suggested that it would somehow be wrong to enable airlines to enjoy a windfall gain as a result of this tax not being retrospective. Airlines such as Ryanair—I mention that one because it has spent a fortune on full-page advertisements campaigning on behalf of its customers against this awful tax—would not refuse to reimburse its passengers who travelled on flights between 1 February and 21 March; to do so is unthinkable. My hon. Friend the Member for Wycombe has not adduced any evidence to suggest that these commercial organisations would refuse to refund the money. In fairness, he does them an injustice if he thinks that they would behave in that way.
I can give the hon. Gentleman some evidence, although it is an assumption so far as Ryanair is concerned. Ryanair is the kind of airline that used to charge passengers for using a wheelchair.
I know that Labour Members do not like Ryanair, which I think has been voted by its passengers the airline of the year and is one of the fastest growing, most successful airlines. My only regret is that it is not British-owned, but it is providing a very good service for its passengers. I am proud, as the Member of Parliament with Bournemouth international airport in his constituency, that Ryanair is one of its more popular operators. I hope that it will expand its number of routes next year.
In the event that my hon. Friend’s amendment is passed and an airline subsequently refused to reimburse its customers for money that it had extracted from them on the basis that it needed to meet the tax liability imposed retrospectively by the Government, would it not be in a very weak position in the courts, having obtained money under entirely false pretences?
My hon. Friend is absolutely right.
The sad thing is that the argument that the airlines might not reimburse the money and might pocket it for themselves and their shareholders is the only argument on which my hon. Friend the Member for Wycombe relies in saying that he does not want the House to support the amendment. I welcome his re-stating our party’s opposition to the principle of retrospection and his saying that we will table a new clause on Report, but actions speak louder than words, and the clearest message that our party could send tonight to our constituents is to vote against this example of retrospective legislation. It is very unfair and, as has been pointed out, it will be particularly damaging to those who booked their flights furthest in advance, who tend to be the weakest members of our society financially. It is time for us to give them some relief from this ghastly Government, so I hope that Members will support me in the Lobby this evening.
Question put, That the amendment be made:—
I beg to move amendment No. 13, page 8, line 29, at end add—
‘(7) This section shall come into force on a day which the Treasury may by Order appoint.
(8) No order may be made under subsection (7) unless the Treasury has compiled and laid before the House of Commons a report containing an assessment of the impact of air passenger duty on the objective of reducing carbon emissions, and including an analysis of the comparative effectiveness in meeting that objective of the taxation of air passengers, on the one hand, and of aircraft according to their emissions levels, on the other.’.
In the debate that we have just had on retrospectivity, the discussion strayed into the environmental aspects of the tax, so some of the points that we are about to deal with have been covered already. I do not want to duplicate them, but this amendment would provide a mechanism obliging the Government to look more carefully at how environmental differentiation can be introduced into the taxation of the aviation industry.
In his reply to the previous debate, the Financial Secretary sought to justify the Government’s proposals in environmental terms, and I think that he said that the air passenger duty was introduced in 1994. I have not checked on that year’s Budget speech, but I should be very surprised if the word “environment” passed the then Chancellor’s lips. It was an era when politicians who thought at all about the climate thought about global cooling rather than warming, so the eloquent argument about carbon emissions is something that we have discovered in retrospect.
I am grateful to the hon. Gentleman for giving way. That word did not pass the Chancellor’s lips.
Indeed, and the tax being proposed at that time was not an environmental tax at all, but a revenue measure. However, the Financial Secretary was right to say that we now confront a different kind of world, where there is a legitimate and powerful concern about the environment, and particularly about global warming. As he rightly said, carbon emissions from the aviation industry are substantial and growing very rapidly. The question is whether the air passenger duty is a reasonable proxy for an environmental tax.
Can the environment be taxed in a better way? There is a strong argument that the air passenger duty is a very clumsy way to tax the environment. That point was made in a brief interjection by the right hon. Member for Suffolk, Coastal (Mr. Gummer), who was ruled out of order but whose point was nevertheless correct. The current duty penalises airlines that use their aircraft efficiently. The same aircraft travelling full pays twice as much duty as one travelling half empty, so there is no incentive to be efficient. Moreover, the duty is inequitable because it bears particularly heavily on low-cost airlines and their passengers.
That is compounded by the fact that this country has a very inefficient system for allocating slots for landing and take off. They are allocated free, and are grandfathered. No consideration of efficiency is involved, so airlines are under no pressure to use their aircraft efficiently in terms of passenger use. Very often, slots are acquired and retained so that competitors are kept out of the business but, were they auctioned in a more economically rational way, there is no doubt that aircraft would be used more efficiently. The combination of inefficient allocation of airport slots and the existing taxation system is pretty rough and ready, and an ineffective environmental measure. However, no doubt the Minister’s figures are right and he is working on Treasury assumptions about the elasticity of demand. Doubling the tax will no doubt have a rough and ready impact on carbon emissions. The question is whether it could be done significantly better.
This morning, the Treasury issued a ministerial statement. When I started to read it my heart jumped because the first sentence said that “air passenger duty”, as defined,
“could send inappropriate environmental signals and cause market distortions”.
At last, I thought, the Treasury has got the point and it will look at different options. However, it turned out that what was produced in a long and complicated consultation paper has nothing much at all to do with the environment; it would produce simply a more equitable sharing of the burden of air passenger duty between different categories of passenger. The Government have spotted that there are such things as airlines with only one travel class and their passengers may qualify for the lowest rate of duty. The Government are concerned about the anomalies and have produced a complicated consultation paper to deal with them. I have not yet had a chance to study it, but it does not seem at first sight—the Minister may correct me—to have much to do with environmentalism.
Has the hon. Gentleman noticed that almost all the proposals will in fact increase the Treasury take with no noticeable environmental difference? Is not that all of a piece with the legislation?
The right hon. Gentleman has the advantage over me, because he has had the chance to read the consultation paper carefully. I am sure what he says is true and that when I study the document that conclusion will emerge.
Is there a better way of taxing the aviation industry that captures more effectively the environmental impact? If we were starting from scratch and did not have to worry about legal constraints, the obvious thing would be to tax the fuel. That could be done on domestic flights, although they are only a small percentage of the total, but it would be difficult to implement internationally, partly for treaty reasons and partly because airlines would simply hop from one low-fuel jurisdiction to another and fill up where the duty was lowest. There would thus be no point in pursuing that theoretically attractive option.
We suggest a simple mechanism, whereby the tax is applied in relation to the emissions produced by different types of aircraft. The model is the environmental differentiation in vehicle excise duty; different categories of vehicle are classified according to their carbon dioxide emissions and aircraft could be similarly banded. It would be a one-off tax at the point of departure, not at all complicated and probably simpler to administer than the present system. Because it would be a tax on departure and related to the CO2 emissions of a particular type of aircraft it would implicitly discriminate against short-haul flights. Paying the same duty whether the flight is to Edinburgh or Australia is not environmentally desirable because there are genuine alternatives to short-haul flights. There are no easier forms of public transport to Australia, but it is possible to switch to rail to travel to Edinburgh, Newcastle or even Cornwall, so a form of duty related to emissions makes more sense if it discriminates against short-haul flights. Environmentalists argue, too, that the greatest CO2 emissions are at take-off, when the booster impact of the engines is strongest.
No doubt there are technical problems that would have to be resolved, but we tabled the amendment to invite the Government to consider that option and to make a judgment about how such a system might operate before they proceed further down the route of more increases in air passenger duty. We merely ask them to study the feasibility of the alternatives. They are embarking on consultation about different methods of taxing aviation. I am surprised that its reach is so narrow and that the Government are not willing to look at the possibilities we have suggested, which are driven by environmental considerations.
It is a pleasure to see you in the Chair, Mr. Illsley. May I encapsulate what I want to say on behalf of the official Opposition about the amendment by saying to the hon. Member for Twickenham (Dr. Cable) that if his amendment had proposed only an assessment, we would have been tempted to vote for it? However, it does not do only that, so for that reason, as I shall explain, we do not propose to support it. Indeed, I shall explain why we believe that it is irresponsible.
Let me begin to consider the alternatives that the hon. Member for Twickenham referred to by making an assessment of air passenger duty itself. Perhaps the best way to start is to see what APD’s most enthusiastic supporters, including the Financial Secretary, say about it. Apparently, APD is “not an environmental tax” and is not related to “a concern about emissions” or more efficient aircraft and “not related at all” to “more efficient use” of aircraft that are flying.
Who said that? One might have thought that it would be the hon. Member for Twickenham, but it was, in fact, the Financial Secretary when he appeared before the Treasury Select Committee last year. He may have thought, in retrospect, that he was not clear enough, so he came back this year to remove any possible ambiguity. He said that APD was
“a blunt instrument as far as the environment goes. It is not the best policy instrument to try to deal with the environmental impacts of aviation”
“not even the best tax instrument to deal with the effects of aviation”.
That is the unvarnished view of the Minister whose task it is to sell the doubling of this tax to the Committee tonight. As the hon. Member for Twickenham said, the Financial Secretary has placed a consultation document in the Library today, which relates to the industry’s view that the way in which air passenger duty defines different classes of travel could send inappropriate signals and create market distortions.
In general terms, the Financial Secretary was very plain in his view of APD, so I think that we should return the compliment. We agree with the green critique that he set out. Indeed, we could scarcely put it better ourselves and I do not think that the hon. Member for Twickenham could put it any better either. The main points are well rehearsed: APD is not linked directly to emissions; it does not provide any incentives to use more fuel-efficient aircraft, and so forth.
The hon. Member for Twickenham referred to what my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) said when he introduced APD. Indeed, my right hon. and learned Friend did not use the word “environment” at all. He said at the time, rather baldly, that air travel was “under-taxed” compared to other sectors of the economy. In short, APD is not a green tax, but an aviation tax.
Is it not also true that the inequality that the consultation document is attempting to resolve takes us back to the point for which air passenger duty was created? As well as airlines such as Eos today, back in 1984 we also had Concorde. Such airlines benefited from exactly the same differential impact.
I must confess that I have not yet got to the bottom of the consultation document, but if the hon. Lady is saying that APD is an aviation tax, I agree with her. Where we part company is that we are not opposed in principle to an aviation tax. I could not credibly stand at the Dispatch Box and argue that we were when my right hon. and learned Friend the Member for Rushcliffe introduced it and set out the reasons for it so clearly. We support the principle of aviation taxation. We took that view in government, we have maintained it in opposition and we certainly do not intend to resile from it tonight.
That is a vital point when considering the Liberal amendment, which is designed to assess the merits of APD against the merits of alternative means of reducing emissions, while implementing a delay—a key point—in the APD increase proposed in clause 12. In other words, if the amendment were accepted, the increase would be delayed. It simply would not happen as envisaged.
There is no timetable in the amendment for when the study that the hon. Member for Twickenham referred to would report. The Liberal Democrats want an assessment and they want a delay. We certainly agree with them that there should be an assessment. Indeed, we are already making our own assessment. Our policy consultation document “Greener skies”, which quotes the Financial Secretary at length, confirms that, together with our quality of life policy group, we will consult the industry.
When it comes to not setting a timetable, does the hon. Gentleman agree that, if the Treasury is desperate for the money, that is all the more reason to make sure that the consultation is undertaken rapidly?
I am worried about proposing a delay without proposing a firm alternative. I want to come to that point in due course.
I wonder whether I can help my hon. Friend. It is certainly my view that any assessment that was going to hold water on this issue would take some time, because the Treasury has done little work on this matter. It is a great sadness that the Treasury is so Brown and not green. An assessment will take a long time. That adds weight to my hon. Friend’s argument—although I am in general sympathetic to the Liberal amendment.
That is why I would be extremely pleased—as, doubtless, would the Liberals—if the Financial Secretary said tonight that, once the clause is passed, the Government will carry out an assessment of a replacement for APD. The Financial Secretary has never ruled that out. I am interested to know whether he will do so when he responds to the debate. We believe that there should be an assessment. What I find hard to understand is why the Liberals believe that there should be an assessment. They have already announced their policy on aviation tax. The document that sets out their so-called green tax switch, to which I will return in a moment, states that their policy is
“to replace the existing airport passenger duty with an aircraft tax based on the emissions of each aircraft”.
The hon. Member for Twickenham went into that. That is a perfectly sensible option. It is in our own policy document. But, for the Liberals, it is not an option; it is a firm policy commitment, as they know. A question naturally follows: if they want to replace APD with a new aircraft tax, why have they not tabled an amendment that proposes exactly that? Why do they need the Treasury to assess their own policy? [Interruption.] They may say that their proposals involve a tax increase and that one cannot table an amendment that is in order if it involves a tax increase. In answer to that, I would ask: why is it that last year—the hon. Member for Wolverhampton, South-West (Rob Marris) and I are veterans of these debates—they did exactly that in relation to vehicle excise duty?
I would be grateful to the hon. Lady if she confirmed that that is exactly what happened.
There is an issue about revenue-raising measures and whether they can be debated on the Floor of the House. Only the Government can propose revenue-raising measures. There is also an issue in relation to the Ways and Means resolution. The amendment has to be broadly within the scope of what is in the Finance Bill. On that basis, we were unable to introduce an alternative.
But the hon. Lady did that last year in relation to vehicle excise duty.
No. We proposed changes to vehicle excise duty; we did not propose an alternative to vehicle excise duty. The issue with air passenger duty is that we cannot change it to something entirely different, because that would be outside the scope of the Ways and Means resolution.
They were both tax rises. The amendment that the hon. Lady tabled last year on VED was outside the scope of what was eligible to be tabled for debate. [Interruption.] Well, the Liberals will have to explain why they were so keen last year on tabling amendments that were not eligible for debate, but will not do so this year. I suspect that the real reason is that, according to independent commentators—I am not claiming that this analysis comes from us; it comes from the Institute for Fiscal Studies—their green tax switch figures simply do not add up. That means that their proposal is not ready to fly. According to the IFS, the Liberals would fund their £8.1 billion rise in green taxes partly by raising fuel duty in line with inflation. But according to the IFS, the Government have already pencilled that rise into their spending plans, leaving the future Liberal Government, which the Liberals presumably believe will take office after the next election, with a £3 billion annual black hole in the public finances.
That is just the start; according to the Liberals, that £8.1 billion green tax rise is actually a £20 billion green tax rise, but they will first have to produce an independent arbiter who supports their view that their new local income tax, house price tax and pensions stealth tax, which make up the remaining £11.9 billion of their £20 billion package, are somehow green taxes. I realise that the Liberals do not like to have those details ventilated in the Chamber, but it was the Institute for Fiscal Studies, and not us, that first raised those points. I would be out of order if I continued down that path, although I am certainly not out of order at the moment.
Does the hon. Gentleman agree that amendment No. 13 shows the chaos of Liberal Democrat green tax policy? The Liberal Democrats want green taxes, not in order to change behaviour, but simply to enable a tax grab. They are not what most of us would think of as green taxes that change behaviour, and the amendment clearly shows that. The hon. Member for Eastleigh (Chris Huhne) has admitted to me in debate in the Chamber that the Liberal Democrats do not propose green taxes as a way of changing behaviour; they will carry on with green taxes regardless of any changes.
I certainly agree that the proposals are pretty chaotic. Again, I note that there is no substantial amendment setting out Liberal Democrat policies in any form. However, I will not carry on down that road. I have made my point, and no one has got to their feet to say that the Institute for Fiscal Studies is wrong. We agree with the Liberals that there should be an assessment, but we do not agree that there should be a delay, because a delay would prevent the aviation tax proposal from coming into effect. For the Liberals, different considerations apply, and I shall explain why. After the next election, there may be a Conservative majority, a Labour majority—personally, I am rather doubtful about that—or no majority at all in the House, but it is safe to say that there will not be a Liberal Democrat majority. I shall repeat that, in case anyone wants to challenge it: I do not believe that there will be a Liberal Democrat majority in the House.
Unlike the two main parties, the Liberal Democrats are not overburdened with expectations of great responsibility. I presume that if they put their amendment to the vote this evening and it is defeated, they will vote against the clause, just as they voted against the measures in it at the conclusion of the Budget debate. In other words, tonight, they can cheerfully vote against the principle of aviation taxation, although they have no workable alternative to propose, knowing that they will not have to live with the consequences in office. That is not an approach that we can take. Unhappy as we are with air passenger duty as it stands, and with the Chancellor’s handling of it, we simply do not believe that we can responsibly vote not to implement an aviation tax that we were responsible for designing, either by opposing the clause or by supporting the Liberal amendment.
The House has a choice tonight on APD, however flawed the tax may be in principle, and however faulty the Chancellor may be in practice. Members can either vote with the Liberals against the principle of aviation taxation, with no workable alternative anywhere in sight, or they can take the responsible course, and take a principled stand against the short-termism and opportunism that the amendment represents.
I would like to be able to support the content of the Liberal amendment, because the Financial Secretary to the Treasury has been disingenuous in the way in which he has tried to defend the tax that we are discussing. The two arguments that he has used are flawed and damaging to the environment. His first argument was that air passenger duty is an environmental tax—not a very good or effective one, and not one that he would have chosen if there were anything else around, but the only thing that he could scrabble together at the time. That, roughly speaking, is his view of the tax.
The Minister went on to say that it was not a bad tax in retrospective terms, and that he would fight very hard in the courts to make sure that nobody won a case against him. The problem for me is simple. We will need regulation and a shift—not an increase, but a shift—in taxation from taxes on the family and taxes on business to taxes on pollution. However, if the country believes that that is not for the purpose of the environment, but is merely another sleight of hand, another stealth tax in order to gather money for the Treasury, that undermines our ability to take the nation with us in the tough measures that we will have to adopt.
I was disappointed by the Minister’s reply to the last debate, because although it was ruled out of order to talk about the environment, he did so. He mentioned that the tax was environmentally healthy. He also suggested that some minuscule amount of emissions might or might not be saved on some technical arrangement that the Treasury had gone into. Everybody knows that this is a tax to raise money.
I have a slight disagreement with the hon. Member for Twickenham (Dr. Cable), which I know he will not mind. When my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) introduced the landfill tax, he made it clear that that was an environmental tax. Even though my noble Friend the then Prime Minister allowed me to raise the rules for the defence of the sea because climate change was a real issue—and that was in the early 1980s—back in 1994, the emissions from aircraft were significant only to a very few. There were not many aircraft, the amount of emissions was not very great, and it paled into insignificance when compared with other things. The kind of nonsense that Ryanair peddles now was true then.
Since 1994 Ryanair and others have entered the market, there has been a huge increase in emissions, and those emissions are particularly great in the United Kingdom. If they continue at the present rate, they will use up all the reductions that we can make in the immediate future in other areas of carbon emission. Of course we must be very tough about emissions from aircraft. We know that that is not easy, because many of the people who have taken advantage of cheap flights have found that that hugely improves their quality of life. Any of us trying to deal with the issue knows how difficult it is.
That is why the Minister has done the environmental movement a great disservice by pretending that this ineffective, money-raising tax has anything to do with the environment at all, and why he knows in his heart—that is why he is looking down—that it would have been credible only if he had introduced at the same time a measure resembling the amendment, and said clearly that he needed the money. Honesty is the best policy. Whereas my right hon. and learned Friend the Member for Rushcliffe was honest, I have to say, within the rules of the House, that I do not quite catch that in the present Administration.
The right hon. Gentleman mentioned the growth in low cost airlines. Is not one of the paradoxes of the whole issue that many of the low cost airlines are flying with relatively new planes fully laden, whereas many of the flag carriers are going round the world with virtually empty planes, causing a great deal more pollution per passenger? That is one of the problems with the Government’s solution, and one of the things that our proposal would catch.
I agree with the hon. Gentleman. I was not attacking low cost airlines; I was merely saying that because of low cost airlines, there is a lot more flying. This tax is fundamentally a tax on the good airlines which have a proper number of people on their planes, because a full plane costs a lot more in tax than an empty plane.
The idea that it does not matter that the Government are taxing airlines retrospectively, because airlines can pay the tax out of their profits, is the most peculiar piece of logic that I have ever heard. The truth is that the Government are taxing the airlines, which will either pay the tax themselves or pass it on. The fault is the Government’s, not anybody else’s. My objection is that what the Government are doing with taxation is not helpful when it comes to emissions or green taxation generally.
There are, for example, 39 flights a day to Manchester from London, which is not a sensible way of using our slots, but there are also aeroplanes that can fly across the country and provide a real service to places such as, for example, Cornwall. Because such flights involve turboprops there are fewer emissions, and the flights can be very full. I am not opposed to examining that particular proposal, although it needs to be part of a whole package. We need to talk about slots. I understand that it is often cheaper to have a short-haul slot than a long-haul slot, which cannot be sensible.
There is a whole range of such issues that must be looked at. I have admiration for the Financial Secretary, who is a decent man. I am not making a party political attack, but how has he allied himself with the Treasury, which has not done any of that work, which has not produced a reasonable basis for the tax and which has not bothered? The Treasury has fiddled about with a tax that it knows does not work and pretended that the tax is environmental.
That is why I am interested in the amendment—but I must tell the Liberals that nothing would get me to vote for Liberal taxation proposals. I have got a very long memory, and I remember Liberals who supported tax on domestic fuel until there was a by-election, when they changed the policy overnight in order to win that by-election. The Liberals and taxation are about taxes that people do not think will hurt—the moment that taxes hurt, the Liberals get rid of them. The Liberal party is the party that no one can take seriously on the environment, because the Liberals resile from anything that is difficult. I would vote Labour a dozen times before ever voting Liberal, because at least you know what you are getting. As a constituent of mine said on the doorstep, “The choice in this village is between the Conservatives and the Liberals, and you never know where you are with the Liberals. If God had been a Liberal, we would have had the 10 suggestions.” Homespun humour gets to the heart of the issue, so do not come telling us about your taxation policies, Liberals, because we know what they are—never do the tough thing; always talk the sweet talk.
That is why I think that my hon. Friend the Member for Wycombe (Mr. Goodman) has done the right thing, which is to say that we will vote for this tax because it is a tax to raise money, and tell the Government that we would like two things from them. Either they accept the sense of the Liberal amendment and say that they will produce some properly audited, sensible proposals so we can all see the figures and make an environmental decision in the future—or, if that is not possible, that the Government themselves will say that there needs to be a different way of looking at taxation on aircraft that is much more closely associated with the damage that aircraft do to the environment.
Finally, I am usually able to say such things on the side of the Government with a clear conscience, but I remember that our Prime Minister changed his view even on this matter from the morning to the evening, when he was pressed on the perfectly reasonable question why he felt in the circumstances of today that to take two holidays a year in the Caribbean and none at Chequers was reasonable. Between the morning and the evening, he moved from pooh-poohing aircraft taxation to coming forward with a nicely chiselled but largely irrelevant proposal.
We need to be frank about this measure—it is intended to raise money—but we need also to tell the Government that they have done a serious disservice to the environmental movement by pressing it in this form, and urge them to make up for the damage that they have done.
I agree with quite a lot of what the hon. Member for Wycombe (Mr. Goodman) said in response to amendment No. 13, which I shall oppose. I do not wish the increase in air passenger duty to be delayed, and I do not think that it is right to put in statute a demand for an “assessment”. We need aviation taxes to raise revenue and to cover the externalities of air travel. We also need additional, not replacement, taxes to change behaviour. If, as I hope, behaviour changes as a result of these taxes, we will have had a positive result in terms of that desired outcome and the Government will not have to worry about revenues from green taxes, in this case on aviation, dropping. The central paradox, if not contradiction, in the Liberal Democrats’ position on green taxes is that they do not really want behaviour to change, because that would mean that tax revenue would drop and they would have an even bigger hole in their budget.
Nevertheless, I have a lot of sympathy with what the hon. Member for Twickenham (Dr. Cable) said about aircraft movements. In 1994, when the tax was first introduced, it had a small aircraft-related element, in that aircraft weighing less than 10 tonnes were exempt. That was to do with flights of small planes from Scottish islands, Cornwall and so on. The Liberal Democrats have a point in saying that when we try to change behaviour we should tax the right thing, which is aircraft movement rather than people. As the hon. Member for Twickenham said—this had not occurred to me and I thank him for raising it—his proposals on taxing aircraft movement rather than passengers would have a differential effect domestically as against internationally, because, as it would be calculated per take off, proportionately speaking it would hit harder domestically. He is right to say that the substitution effect is possible domestically but not for long-distance international flights, although it is possible in the case of other countries in western Europe, where one can take the train, as I do.
I urge my hon. Friend the Financial Secretary to take on board the comments that have been made about the additional green taxes on aviation that I would like in order to change behaviour, particularly domestic behaviour. Let me give an example. We could all cite the difficulties that we have in encouraging the green agenda given the cost of travel in the United Kingdom. One of my nieces, who lives in Sheffield, has just flown to Thailand. When I asked her whether she was going from Gatwick or Heathrow, she said that she was travelling from Sheffield to Manchester, flying from Manchester to London, and then flying on to Thailand on a different flight. That is not a great green message for the next generation, but she is a young woman of modest means, to say the least, and that was the cheaper option. Additional green taxes might change things in some way in the case of domestic flights.
Does the hon. Gentleman not agree that broadening the scope of the consultation would prove useful because the Financial Secretary has already said that he favours a move towards emissions trading for aviation? Would not broadening the scope help the Treasury prepare better for that?
Yes, I believe that broadening the consultation is a good idea. I imagine that the amendment was tabled before the consultation document was issued, but I do not believe that primary legislation is the place to include broadened consultation or an assessment, especially given that the amendment is framed to delay the increase in air passenger duty as a nakedly, openly revenue-raising measure for the Government, which I support. I do not agree with the amendment but I hope that my hon. Friend the Financial Secretary will consider broadening the consultation on aviation taxes as a revenue-raising measure, and on additional taxes to change behaviour.
I congratulate the hon. Member for Twickenham (Dr. Cable) on prompting a wide-ranging debate on a narrow clause. I acknowledge the consistent interest and expertise that the right hon. Member for Suffolk, Coastal (Mr. Gummer) brings to bear on such issues. That also applies to my hon. Friend the Member for Wolverhampton, South-West (Rob Marris).
Let me say to the right hon. Gentleman that, as the hon. Member for Wycombe (Mr. Goodman) acknowledged, I have always been clear about air passenger duty. The Chancellor has also always been clear about it. When he announced the doubling of air passenger duty on 6 December, he said in his pre-Budget statement:
“Currently, aircraft emissions are not part of the EU emissions trading scheme, and nor is aviation fuel taxed. While we continue to work internationally to seek a global agreement on reducing aircraft emissions, each country must take action domestically. From 1 February, we will double air passenger duty. For most journeys—over 75 per cent. of them—duty will rise from £5 to £10, securing extra resources in the coming spending round for our priorities, such as public transport and the environment.”—[Official Report, 6 December 2006; Vol. 454, c. 310.]
There we have it.
Air passenger duty has an environmental impact but it is not an environmental tax such as landfill tax, which the right hon. Member for Suffolk, Coastal mentioned. That was designed and introduced for the policy purpose of making an environmental impact.