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Finance Bill

Volume 462: debated on Monday 25 June 2007

As amended in the Committee and in the Public Bill Committee, considered.

New Clause 5

Restriction on expenses of management

‘(1) Section 75 of ICTA (expenses of management: companies with investment business) is amended as follows.

(2) After subsection (2) insert—

“(2A) A deduction is not to be allowed under that subsection for any particular expenses of management if any part of those expenses is incurred directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure the allowance of a deduction (or increased deduction) under that subsection or any other tax advantage.

(2B) Subsection (2A) above does not apply if, as a result of paragraph 7A of Schedule 23A (manufactured payments under arrangements having an unallowable purpose), the company incurring the expenses is not entitled to a relevant tax relief (within the meaning of that paragraph) in respect of, or referable to, the whole or any part of the expenses.

(2C) The reference in subsection (2A) above to expenses of management includes amounts treated by any provision as deductible under this section.”

(3) After subsection (5) insert—

“(5A) For the purposes of subsection (5)(a) above investments are not held for a business or other commercial purpose if they are held directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure the allowance of a deduction (or increased deduction) under subsection (1) above or any other tax advantage.”

(4) After subsection (10) insert—

“(11) In this section—

“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable), and

“tax advantage” has the meaning given by section 840ZA.”

(5) The amendments made by this section have effect in relation to accounting periods beginning on or after 20th June 2007, but have no effect in any case where the particular management expenses in question were paid before that date.

(6) In the case of an accounting period of a company beginning before, and ending on or after, that date, those amendments have effect as if, for determining the amounts that are deductible for the period under section 75(1) of ICTA, so much of the period as falls before that date, and the rest of it, were separate accounting periods.’.—[John Healey.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

New clause 5 introduces a targeted anti-avoidance rule that tackles the use of tax avoidance schemes designed to generate deductions in respect of “expenses of management” under section 75 of the Income and Corporation Taxes Act 1988. If left unchecked, those schemes would cost the UK Exchequer—the public purse—£1 billion a year. Section 75 of the 1988 Act provides “companies with investment business” relief for the expenses of managing that investment business. The rules were introduced way back in 1915 and originally applied only to pure investment companies and to insurance companies.

The rules remained largely unchanged until the Finance Act 2004. The changes that we made three years ago widened the range of companies able to obtain relief for expenses of management. They also specifically excluded capital expenditure and introduced an unallowable purpose rule in relation to investments not held for a business or commercial purpose. The unallowable purpose rule made no explicit reference to tax avoidance purposes. It was believed at the time that that rule and a tough approach to the construction of the phrase “expenses of management” derived from case law would be sufficient to stop any abuse. Sadly, the appetite of some for tax avoidance has proved us wrong. In the past two or three years, the disclosure of tax avoidance schemes rules and other inquiries have shown us that there are already a number of avoidance schemes that create deductions for relief as expenses of management which are both substantial and contrived.

The latest scheme is an attempt to circumvent other anti-avoidance legislation introduced in the Finance Act 2004. It creates a wholly artificial deduction for management expenses in return for the receipt of a dividend to which the UK company was already entitled before the scheme was put in place. These payments—treated by the companies as management expenses—are made to overseas companies, which are usually located in tax havens and therefore usually outside the UK tax net. The group of companies as a whole suffers no economic loss as the money is effectively flowing in a circular fashion—the loss is actually borne by the UK Exchequer. That happens when the holding company gets relief for the artificially manufactured management expenses. That sort of scheme is relatively easy to implement and we calculate that—if effective—it has already put at risk more than £240 million to the public purse. Without urgent action, many more groups of companies are likely to adopt the scheme.

Her Majesty’s Revenue and Customs does not accept that the schemes are in accordance with existing legislation. Given the potential cost to the Exchequer and the uncertain outcome of litigation, we are taking action now, to put the issue beyond doubt. The new clause confirms that assets held for a tax avoidance purpose are not held for a business or commercial purpose of the company, and ensures that the scope of the provisions is as wide as possible. We believe that the changes deal with the known schemes and also go appropriately wider, countering any other schemes that might try to secure relief of contrived management expenses.

The sheer size of the potential cost requires immediate action. I therefore regret that, in those circumstances, it has not been possible to consult on the new clause. However, the measure will not affect compliant companies. It affects only those that are involved in tax avoidance. The new clause tackles artificial schemes and will not therefore affect commercial transactions. I commend it to the House.

I thank the Financial Secretary for his explanation of the circumstances that lie behind the new clause. It elaborates on the letter that he sent to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) and other members of the Committee last week. In the letter, the Financial Secretary said that the estimated cost approached £1 billion, but in his remarks he said that it was £240 million. I appreciate that the Treasury likes to round things up from time to time, but that appeared to be a large rounding up. Will he be a little clearer about the basis of both the figure in his letter and the cost that he cited in his speech?

My broader concern is that the new clause is drafted widely, as the Financial Secretary acknowledged. We held several debates in Committee about the breadth of anti-avoidance legislation. We had a long debate about the way in which broadly framed legislation was subsequently narrowed through guidance. I was therefore disappointed, given the circumstances that gave rise to the new clause, that the provision was not more tightly drawn to attack the specific abuses that he highlighted of group companies, the use of dividends and so on as a means of generating management expenses. I wonder why he feels the need to phrase the new clause so widely. Are not we in danger of creating uncertainty among taxpayers and their advisers through the breadth of the provision? Cannot we have a more specific provision to tackle the abuse that he mentioned?

I thank the hon. Gentleman for the measured way in which he at least implied that he and his party would support the step that we are taking.

In a sense, I covered the reason for our framing the new clause in such a way in my speech. It covers the known schemes and our anticipation of the way in which other contrived schemes—those that try to take advantage of management expenses relief—may be constructed.

We calculate that what Her Majesty’s Revenue and Customs has already examined under the system of notification has put at risk £246 million to the Exchequer. If left unchecked, the schemes would put at risk approximately £1 billion to the Exchequer and the public purse. I hope that that helps to explain the two figures that I used this afternoon and the one figure that I cited in my letter to the hon. Member for Chipping Barnet (Mrs. Villiers).

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 13

Updating references to standing committees

‘(1) In section 1(4)(b) of the Provisional Collection of Taxes Act 1968 (c. 2) (circumstances in which a resolution affecting income tax etc ceases to have effect), for “Standing Committee” substitute “Public Bill Committee”.

(2) In section 50(2)(a) of FA 1973 (corresponding provision for stamp duty), for “Standing Committee” substitute “Public Bill Committee”.’.—[John Healey.]

Brought up, and read the First time.

With this it will be convenient to discuss new clause 1—Amendment of Provisional Collection of Taxes Act 1968—

‘(1) The Provisional Collection of Taxes Act 1968 (c. 2) is amended as follows.

(2) In subsection (4)(b), for the words “Standing Committee” there are substituted the words “Public Bill Committee”.’.

We are making very good progress. No doubt, that will not last, but let us enjoy it while we can. Perhaps the House will enjoy the fact that Government new clause 13 will be considered alongside new clause 1, which was tabled by the Opposition, as, happily, they have been grouped together.

New clause 1 proposes what, in principle, is a valid change, but when I studied the way in which it was framed I found that the detail of the drafting did not quite live up to the intention. I therefore determined to table new clause 13 in the same spirit—it has the same aims as the Opposition’s provision, but it is more comprehensively drafted. Both measures have the same purpose, and I hope that hon. Members on both sides of the House will join together in support of the inclusion of new clause 13 in the Bill.

I do not intend to detain the House and impede the speedy progress that we have achieved so far. I am grateful for the Financial Secretary’s comments about new clause 1 and the fact that he accepts the principle behind it. Indeed, in his letter to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers), he acknowledged that it was a valid change. I do not wish to have a row about whose drafting is better; I fully accept new clause 13. I do not know whether it is a sign of a new, listening Government or whether it is a sign of a new, listening Treasury. None the less, new clause 13 is welcome, and consequently the Opposition have no intention to press new clause 1 further.

It is interesting to see that the new consensus between the two parties is so broad that it extends to section 1(4)(b) of the Provisional Collection of Taxes Act 1968. It is only a shame that the hon. Member for Wolverhampton, South-West (Rob Marris) is not here to relish the improvements to the Bill’s drafting.

I welcome the welcome from both Opposition spokespeople. May I remind the hon. Member for South-West Hertfordshire (Mr. Gauke) that, during his short experience as a Front-Bench spokesman, we have faced each other twice: this afternoon and in Standing Committee—or Public Bill Committee, as we should refer to it if new clause 13 becomes part of the Bill. On both occasions, I listened carefully to his arguments, which I have been willing to accept in principle, proposing amendments in light of them. I hope that he has a long and distinguished career as an Opposition spokesman, but he will not always find the going as easy.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 2

Principles of good practice for retrospective taxation legislation

‘(1) A Minister in charge of a Bill must, before Second Reading of the Bill—

(a) make a statement to the effect that, in his view, any retrospective taxation provisions of the Bill are compatible with either of the relevant principles of good practice (“a statement of compatibility”); or

(b) make a statement to the effect that, although he is unable to make a statement of compatibility, the government nonetheless wishes the House to proceed with the Bill.

(2) A statement under subsection (1) must be in writing and be published in such a manner as the Minister making it considers appropriate.

(3) In this section, “retrospective taxation provisions” means provisions which—

(i) introduce any new tax, levy, impost or duty, or increase the rate or extend the incidence of any existing tax, levy, impost or duty; and

(ii) take effect on a date earlier than the date on which the relevant enactment enters into force.

(4) For the purpose of subsection (3) it is immaterial whether a Minister gives notice, whether in Parliament or otherwise, of his intention to introduce a retrospective taxation provision which takes effect on a date after the giving of that notice.

(5) In subsection (3)(i) “extend the incidence of any existing tax, levy, impost or duty” includes the removal or attenuation of any relevant relief or drawback.

(6) In subsection (3)(ii) “take effect” includes the creation of a liability or obligation to account for any increased charge to tax resulting from a provision of the kind mentioned in subsection (3)(i), whether or not the date on which the increased charge falls due for payment precedes the date on which the relevant enactment is expressed to enter into force; and in this subsection “account for” includes any decision by a company or business undertaking to absorb or pass on in the form of higher customer prices or charges the additional costs to that company or business undertaking arising from the increased charge to tax.

(7) “The relevant principles of good practice” mentioned in subsection (1) are—

(i) that it appears, whether as a result of a judgment given by a court or otherwise, that some part of the law relating to taxation no longer conforms to the reasonable expectations about its effect previously held by taxation practitioners and that it is necessary to restore the position retrospectively in order to protect the interests of the general body of taxpayers;

(ii) that HMRC becomes aware of a new tax avoidance scheme and it is necessary, in order to prevent a significant loss of tax revenue, to amend the law retrospectively.

(8) In subsection (7) “taxation practitioners” includes the Treasury, HMRC, the accountancy profession, professional tax advisers and groups representing the interests of taxpayers; and “tax avoidance scheme” has the meaning given in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 or the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006.

(9) A taxation provision introduced under the Provisional Collection of Taxes Act 1968 is not to be treated as having retrospective effect for the purposes of this section unless the date on which the relevant resolution of the House of Commons under either section 1 or section 5 of that Act is expressed to take effect is a date earlier than the date on which the resolution under section 1 or, as the case may be, section 5 is passed.—[Mr. Goodman.]

Brought up, and read the First time.

With this it will be convenient to discuss the following: Amendment No. (a), line 2, leave out ‘(a)’.

Amendment No. (b), in paragraph (a), leave out ‘either of’.

Amendment No. (c), in paragraph (a), leave out from ‘compatibility’ to end of paragraph (b).

New clause 7—Limitation on use of retrospective taxation legislation

‘(1) It is the duty of a Minister of the Crown to refrain from bringing retrospective taxation legislation before Parliament unless one of the conditions mentioned in subsection (2) is satisfied.

(2) The conditions mentioned in subsection (1) are—

(i) that it appears, whether as a result of a judgement given by a court or otherwise, that some part of the law relating to taxation no longer conforms to the reasonable expectations about its effect previously held by taxation practitioners and that it is necessary to restore the position retrospectively in order to protect the interests of the general body of taxpayers;

(ii) that HMRC becomes aware of a new tax avoidance scheme and it is necessary, in order to prevent a significant loss of tax revenue, to amend the law retrospectively.

(3) In subsection (2) “taxation practitioners” includes the Treasury, HMRC, the accountancy profession, professional tax advisers and groups representing the interests of taxpayers; and “tax avoidance scheme” has the meaning given in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 or the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006.

(4) In this section “retrospective taxation legislation” means legislation which—

(i) introduces any new tax, impost or duty, or increases the rate or extends the incidence of any existing tax, levy, impost, or duty; and

(ii) takes effect on a date earlier than the date on which the relevant enactment enters into force.

(5) For the purposes of subsection (4) it is immaterial whether a Minister gives notice, whether in Parliament or otherwise, of his intention to introduce a retrospective taxation provision which takes effect on a date after the giving of that notice.

(6) In subsection (4)(i) “extends the incidence of any existing tax, levy, impost or duty” includes the removal or attenuation of any relevant relief or drawback.

(7) In subsection (4)(ii) “takes effect” includes the creation of a liability or obligation to account for any increased charge to tax resulting from a provision of the kind mentioned in subsection (4)(i), whether or not the date on which the increased charge falls due for payment precedes the date on which the relevant enactment is expressed to enter into force; and in this subsection “account for” includes any decision by a company or business undertaking to absorb or pass on in the form of higher customer prices or charges the additional costs to that company or business undertaking arising from the increased charge to tax.

(8) A taxation provision introduced under the Provisional Collection of Taxes Act 1968 is not to be treated as having retrospective effect for the purposes of this section unless the date on which the relevant resolution of the House of Commons under either section 1 or section 5 of that Act is expressed to take effect is a date earlier than the date on which the resolution under section 1 or, as the case may be, section 5 is passed.’.

We have been proceeding so far on the amiable basis of consensus. I hope that we can go further and hear shortly that the Financial Secretary accepts the new clause. It aims to forestall and prevent creeping retrospection from polluting the Government’s finance legislation. I intend to speak to it, as well as to the amendments tabled by my hon. Friend the Member for Christchurch (Mr. Chope) and others, and to his new clause 7.

New clause 2 arises directly from the debate in the Committee of the whole House about air passenger duty in relation to clause 12. I do not intend to repeat the debate that we had on 1 May, but as the new clause deals with retrospection and as retrospection was present in clause 12, I must necessarily set the context that gives rise to the amendment. The definitive statement on retrospection in relation to clause 12 was made by the Treasury Committee as follows:

“The first element of retrospection is that airlines will be liable to pay the tax for departures on or after 1 February 2007 regardless of whether tickets were purchased before the new rules were announced. The second element of retrospection is 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; such authorisation will take place only after the Budget.”

It is worth noting that two separate though related ideas of retrospection are described by the Select Committee in that context. It concluded:

“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.”

The Financial Secretary subsequently offered two 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. However, the House of Commons Library said that

“it is arguable that these examples do not provide a precedent that captures all the aspects of the rise in APD rates”.

In the debate on 1 May, I set out why that is so.

During that debate and in a previous letter to the shadow Chief Secretary the Financial Secretary set out a series of further claimed precedents—the 2002 Budget decisions in relation to income tax rates, and another similar change made to the taxation of North sea oil, the petroleum revenue changes made in 1978 and confirmed in 1979. He was unable to explain why all these claimed precedents were not originally given to the Select Committee. He was also unable to explain why they were being dribbled out in this gradual way, rather than being offered all at once in a coherent whole.

I suspect that the explanation is that the Treasury has been forced to scrape the bottom of the barrel for these precedents, and my suspicion is given at least some backing by the Library, which is no more impressed by the new set of precedents than it was by the old ones. Having been consulted, it repeats:

“It remains the case that none of these examples provide a precedent that appears to capture all the aspects of the rise in APD rates”.

The readiness to reach for retrospection in relation to APD, the failure to offer precedents to the Select Committee and then to discover them afterwards, and the insubstantial nature of the precedents, all considered together, send a dangerous signal to taxpayers, consumers, businesses and tax practitioners. If the Government are prepared to legislate retrospectively and unprecedentedly once, and in doing so, drawing a rebuke from the Select Committee, what is to prevent them from using this unprecedented APD rise as a further precedent in the future? It is in order to prevent them from doing so again that we have tabled the new clause. In the Committee of the whole House, I said:

“We intend to table a new clause at a later stage which will prevent the Chancellor’s successor from behaving in the same way in relation to APD”.—[Official Report, 1 May 2007; Vol. 459, c. 1435.]

I believe that the new clause would indeed prevent the next Chancellor from behaving in the same way again.

The amendments tabled by my hon. Friend the Member for Christchurch, together with his new clause 7, seek to remove any remaining element of doubt. I shall explain to him shortly why we look sympathetically at his proposed amendments (a) and (c) to new clause 2 and at new clause 7. I shall also explain shortly why we have some reservations about his amendment (b).

Before I do so, however, let me explain the basis of new clause 2. In drawing it up, we have attempted to find a basis for legislating in relation to retrospection that will command a consensus in the House. Let me make it clear that we are not against retrospective taxation per se on all occasions. It is reasonable to tax retrospectively in order to tackle a new tax avoidance scheme that threatens a significant loss of tax revenue, for example, or to restore the law in relation to some particular aspect of taxation to what it was believed to be until a court decided otherwise.

That view was set out by my right hon. Friend the Member for Charnwood (Mr. Dorrell) as a Minister in the last Conservative Government. He said:

“Where it is discovered that the tax law does not have the effect that the Government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be. This is done only in exceptional circumstances and where the Government consider such action is necessary to protect the interests of the general body of taxpayers.”—[Official Report, 29 June 1992; Vol. 210, c. 378-79W.]

The conventions that govern the use of retrospection in relation to tax avoidance were set out in the so-called Rees rules, named after our former colleague Peter Rees, now Baron Rees of Goytre—I hope that I am pronouncing that correctly—in 1978. In 2004, the Paymaster General made a statement of the Government’s view that is broadly similar to what I shall name, after my right hon. Friend the Member for Charnwood, the Dorrell doctrine. At present, the Government are entitled to collect new taxes prior to receiving full legislative authority from the passage of a Finance Act under the Provisional Collection of Taxes Act 1968. The trigger, so to speak, for the retrospective APD rise—the cause of this debate—was the passing of the Budget resolutions announced on Budget day.

Under new clause 2, any Minister introducing a Bill that contains retrospective taxation, such as the Finance Bill before us, would be obliged by law to state that such retrospective taxation was, in effect, consistent with the Dorrell doctrine set out under the previous Conservative Government and echoed in the Paymaster General’s 2004 statement. If the new clause were on the statute book now, the Financial Secretary would have been compelled during the debate on 1 May to concede that the retrospective elements of the APD rise contained in this year’s Finance Bill were utterly inconsistent with the Dorrell doctrine and bad practice, since even the Government have not attempted to claim that the APD rise was necessary to prevent tax avoidance by passengers or airlines or to restore the law to what it was previously believed to be. I believe that the Financial Secretary would not have endured the embarrassment and difficulty of so doing, and that the new clause is a strong deterrent to bad retrospective legislation.

As I said, the amendments tabled by my hon. Friend the Member for Christchurch and his new clause 7 seek to remove all possible doubt. His amendments would bar Ministers from proceeding with retrospective tax rises that they declare inconsistent with the Dorrell doctrine. As my hon. Friend knows, we considered tabling a new clause identical to new clause 7 that would have had the same broad effect as his amendments. We decided not to do so for a single reason: the Financial Secretary should have the opportunity this afternoon, we hope in the course of accepting the new clause, to persuade the House that there are some categories of retrospective legislation that are incompatible with the Dorrell doctrine, but that it would none the less be right for the House to be able to consider in the future. My hon. Friend’s amendments and new clause would have the effect of barring the House from considering any such retrospective legislation in future. However, I have to say to him and to the House that I very much doubt whether such categories exist and whether the Minister can make such a case. As I have said, that is why we are sympathetic towards amendments (a) and (c) and new clause 7. If new clause 2 is passed, we will accept amendments (a) and (c), unless the Financial Secretary can persuade us otherwise. If, having accepted amendments (a) and (c), new clause 2 is none the less unsuccessful when put to a vote, I will advise my right hon. and hon. Friends to vote for new clause 7.

We have some reservations about amendment (b). New clause 2(1)(b) would permit a Minister to introduce a retrospective tax measure as good practice that would either close a significant new tax-avoidance loophole or restore the law to what it was previously believed to be. New clause 7 maintains that either/or principle. However, amendment (b) takes a different view. Taken with the other amendments, it would permit a Minister to introduce a retrospective tax measure only if it both closed a significant new tax-avoidance loophole and restored the law to what it was previously believed to be. In other words, a Minister would not be able to introduce a retrospective tax measure to close a significant new tax loophole unless they were also restoring the law to what it was previously believed to be and vice versa. According to the Library, the last Conservative Government legislated retrospectively to restore the law to what it was previously believed to be in two cases—section 62 of the Finance Act 1987 and section 116 of the Finance Act 1989. I have been advised that had amendment (b) been in force, the last Conservative Government might not have been able to act in that way.

In conclusion, it seems reasonable for the Government to retain the power to close significant new tax-avoidance schemes immediately, subject to the Rees rules, but I will listen closely to my hon. Friend the Member for Christchurch.

I am particularly pleased to discuss new clause 2, because I spoke in the debate about air passenger duty on 1 May. Unfortunately, I was not a member of the Committee that considered this year’s Finance Bill—I do not know whether I should call it a Public Bill Committee or a Standing Committee.

The hon. Member for Wycombe (Mr. Goodman) has made a speech that is characteristic of his virtues— he displayed diligence, thoroughness, hard work, persistence and civility—but he is absolutely wrong for all the reasons that my hon. Friend the Financial Secretary will explain shortly.

I was expecting more, but the consensus appears to have broken down at an early stage in the afternoon.

I am sympathetic to the principle behind new clause 2. It is important to have openness and honesty about retrospective taxation and, in fact, any changes in the tax system. I was reassured by the comment of the hon. Member for Wycombe (Mr. Goodman) that the objective of the new clause is not to remove at a stroke all retrospective taxes, but to state as a principle that there should be an effort to ensure that such taxes are introduced for all the right reasons.

I am sure that the hon. Member for Bishop Auckland (Helen Goodman) remembers that both this year and last year the Finance Bill included some retrospective taxes, which it was necessary to introduce without consultation because of significant abuses of the taxation system and loopholes that needed to be closed. On that basis, such measures are entirely necessary. However, there are examples—air passenger duty is not the only one—where it is not clear whether a loophole needed to be closed or that avoidance was taking place. On air passenger duty, people who paid for their tickets before the changes were introduced found out that there was an additional charge only when they arrived to catch their flights. It would have made much more sense to examine whether the measure fulfilled the criteria before its implementation.

Retrospection might cause problems for taxpayers in two other areas, which might need to be looked at more widely, and where greater openness might be preferable. The first concerns the agricultural buildings allowance, which was dealt with in this year’s Finance Bill, changes to which will have an impact on investment decisions that were made anything up to 24 years previously. In theory that affects only taxation going forward, but it will have an effect on decisions that people made many years previously with regard to buildings that it is not easy to dispose of if the tax liability represents a significant problem to the businesses involved. I hope that the Minister will be able to assure us that there is at least agreement in principle that clarity on such issues would be welcome.

The second area where there are concerns about people being caught by changes to the taxation system as a result of a lack of awareness arises from changes in last year’s Finance Bill to the inheritance tax treatment of trusts to which people had signed up. To this day, many people may not realise that they have been caught by some of those changes.

Those are our broad areas of concern and we are sympathetic to the point made by the hon. Member for Wycombe.

I thank my hon. Friend the Member for Wycombe (Mr. Goodman) for his open and transparent discussion of these issues with me over many weeks. When I first raised the matter in the Budget debate I found myself in a minority of Conservative Members voting against air passenger duty. However, I overheard one of my colleagues saying, “Since when has it been Conservative party policy not to vote against retrospective legislation?” That voice, which seemed at one stage to be unheeded, has now been heeded, and I am grateful to my hon. Friends on the Front Bench for making that clear by moving new clause 2.

My amendments to new clause 2 and my new clause 7 go a little further, but the effect is that my hon. Friend and I have launched a pincer-movement on the Government. If the Minister can come up with some categories that are not consistent with the Dorrell doctrine beyond those set out in subsection (7) (i) and (ii), he will be able to use that argument against supporting my new clause, but if he does not do so, the way will be open for the House to support new clause 7.

I put my amendments and new clause in an alternative form, and I am sorry that my hon. Friend has a little trouble with my amendment (b). I thought that if the word “either” was removed and we could then get rid of the word “or”, it would be better English. However, I take my hon. Friend’s point that by removing the word “of” as well from line three, that would have the effect of suggesting that both the relevant principles would have to be satisfied rather than just one.

The only point that I can make to counter that is to say that if at some stage in the future the Government came up with extra relevant principles of good practice, it would be possible to amend subsection (7) by adding extra relevant principles, but it would not be so easy to do that if we had the words “either of”, because that suggests that there can only ever be two principles. However, I do not want to go to the wall on that, and I am happy to accept what my hon. Friend says on amendments (a) and (c) and on new clause 7.

This episode has caused an enormous amount of angst among the travelling public and among well-established and successful businesses. For the sake of just over £100 million, the Government were prepared to tear up the conventions relating to retrospective taxation and to introduce a retrospective increase in air passenger duty that has caused an administrative nightmare and that was wrong in principle. Many passengers felt aggrieved that, although they had paid their fees to the airline, when they got to the airport, or perhaps before that, they had to pay an extra tax, because the tax had been increased between their making their booking and taking their flight.

Does the hon. Gentleman agree that it is particularly unfortunate that this whole problem has flared up over a green tax? The public are naturally cynical about the Chancellor’s motives, and they wonder whether the revenue will be used to fund cuts in taxation elsewhere or whether this is just a cynical ploy to raise more revenue for the Treasury.

The hon. Lady is absolutely right. No one is more cynical about green taxes than I am. Even if we accept the argument in favour of green taxation, I have yet to be convinced that air passenger duty is an effective green tax.

My hon. Friend knows that we have slightly different views on environmental taxes, but has he noted that the Financial Secretary told the Treasury Select Committee that the principal purpose of the air passenger duty was to increase revenue? This has never been about green taxation.

I accept that the Government made that admission. It was a candid admission, and my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) made the same admission when he first introduced air passenger duty. He said, “We’re short of money in the Exchequer. We need to find some new taxes.” The Government of whom he was Chancellor of the Exchequer were famed for introducing new taxes. In the end, that resulted in the problems that our party encountered when it had to face the people in the 1997 general election. That is part of history, but my right hon. and learned Friend was certainly candid about air passenger duty being a revenue-raising tax, and I believe that the Financial Secretary has accepted as much. It has been suggested that it is not a revenue-raising tax but a tax designed to alter behaviour, but how can we alter behaviour when that behaviour has already occurred? It is nonsense to make a green tax retrospective, because the behaviour has already occurred. Unless people withdrew their decision to take a holiday with their children or to embark on a flight for some other reason, the retrospective element of the environmental tax would mean that it had no impact whatever.

The hon. Member for Bishop Auckland (Helen Goodman) made a short but pithy contribution. It was one of the most effective bids that I have ever heard for preferment in a forthcoming reshuffle. When I had a junior ministerial role, there was nothing that the Prime Minister and other Cabinet Ministers wanted more than a Minister who would accept that what they said was absolutely the bee’s knees and that there was no reason to argue with it. If the hon. Lady does not gain a ministerial post straight off, perhaps she will be given a position in the Whips’ Office. She would be well—

Order. I have allowed the hon. Gentleman some latitude, but I must now advise him to concentrate his remarks on the new clauses and amendments.

The point of introducing the hon. Lady’s argument was that I have heard the Minister speak on this subject many times in the past, and I have yet to be convinced by what he has said. The hon. Lady has obviously read the different speech that he is going to make in response to this debate.

In essence, we have caught the Minister in a pincer movement. If he accepts that principles should be attached to retrospective legislation, and that those should be enacted in statute for the protection of the public and to introduce certainty, the two categories set out in the new clause tabled by my hon. Friend the Member for Wycombe make that clear. If the Minister thinks that an extra category should be included, let him say so. The problem with new clause 2 is that it is only declaratory—it would be possible for the Minister to make a certificate that a piece of legislation would be retrospective, notwithstanding those two principles. My alternative new clause would prohibit the introduction of retrospective legislation that did not comply with those two principles.

Whichever way the Minister argues, we will get him. I am grateful to my hon. Friend the Member for Wycombe—the work that we have done together augurs well for the work that we will continue to do together when we get into government.

I am a company director and have listed my interests in the Register of Members’ Interests.

For my hon. Friend the Member for Christchurch (Mr. Chope), the debate arose out of the extraordinary decisions on air passenger duty, on which retrospection was clear, flagrant and undesirable. The new clause, however, relates more widely to the whole gamut of the Government’s tax activities. Among my constituents, especially those who are in businesses, who run their own businesses or who have some savings and investment income, there is a growing feeling that things are no longer fair and sensibly run, as they were a few years ago. I am not making a party political point—people felt that things were fairly administered during the first five years of this Government, as they did under the previous Government. I therefore welcome the new clause of my hon. Friend the Member for Wycombe (Mr. Goodman), and the amendments to it from my hon. Friend the Member for Christchurch, as they could go a little way to reassuring my constituents.

The problem is now considerable. My many law-abiding constituents with business interests or savings activities know that they should make an honest declaration of what they are earning or of their savings in the required form, and they accept that they should pay tax. They also believe that they have every right to make intelligent use of fiscal incentives from tax breaks, and some of those offered by the Government in previous Finance Acts have been very attractive, such as the decision to allow more favourable tax status to small business incorporation. Having made intelligent use of those things, they fear that the Government will come down on them like a ton of bricks, saying, “We didn’t really mean it. Oh, goodness me, the fiscal incentive was too successful,” and will find a way of clawing it back and blaming them for having responded rationally to the signals sent out in tax legislation a few weeks, months or years previously.

The Minister must agree that the Government are happy for people to take advantage of tax breaks and fiscal incentives. A series of radio advertisements are currently running on various channels about National Savings and Investments. The whole point of the adverts is that people can be protected from the rather high rate of inflation now prevailing under this Government, and from their tax demands, by buying index-linked National Savings bonds, which, miraculously, are protected from both the ravages of inflation and the depredations of the taxman. That is a perfectly good selling point. I am not here to advertise those bonds today, but it shows that the Government recognise the importance of fiscal incentive in selling savings products and are happy to use it. Having taken advantage of some other fiscal incentive, my constituents therefore feel that it is unfair of the Government to turn round, decide that it is a loophole that is allowing too much revenue to be lost, and try to change things retrospectively.

It was right to mention trusts, because last year’s Finance Act contained a good deal of retrospection in relation to people who had taken good accountancy and legal advice, set up trusts and then discovered that the Government were no longer prepared to live with that, and effectively wanted to unpick it retrospectively. In support of my hon. Friends the Members for Wycombe and for Christchurch, anything that can be done to make the tax system a little fairer and predictable for the many law-abiding, decent citizens trying to live under it would be welcome.

If I have a worry, it is that there are still big loopholes for the Government in the generous drafting that the Conservative Front Bench has come up with, but I am happy to support the new clause because the statement of intent is clear and it is a move in the right direction. However, I hope that this group of Ministers, or their soon-to-be-announced successors, will understand that there is a growing feeling of displeasure about the unreasonable behaviour of the Revenue. People who honestly want to pay their taxes, but who want to take advantage of sensible fiscal incentives, no longer feel that they will be able to do that, or they feel that they will be penalised retrospectively.

May I put the proposition to my right hon. Friend that it is not only true that there is considerable and widespread misgiving on this score, but that that misgiving is especially acute in the small business sector, which tends to be characterised, by definition, by having a much smaller resource available to fight the matter through the courts or through the consultation of expensive lawyers?

My hon. Friend is right and makes an important part of my case. The people I have in mind cannot hire expensive accountants or lawyers for either their personal or their small business affairs. It gives them a greater feeling of injustice because they think that there is law and justice for the very large companies. Those can take the best legal and accountancy advice, and may succeed in winning the case or may have enough cases going forward so that, on the law of averages, they come out of it all right. Law-abiding decent people who run small businesses or who try to put together their savings for retirement do not have that option. Only one case may matter to them, and they will probably lose it. There is the feeling that the Revenue is out to grab as much money as it can from any law-abiding person who advises it that he has a bit of money, rather than the Revenue sensibly following the rules laid down by Ministers and not going in for retrospective changes.

I support new clause 2 because the principle that it espouses of not having retrospective taxation is important for the confidence of investors, consumers and taxpayers, so that they know where they stand when making decisions. The whole point of taxation, especially taxation that is tinged with the idea of green taxation, is that it must be trusted by people if it is going to affect behaviour and influence their decisions. When it comes to investment, people must have the confidence that they understand the fiscal climate in which they are making those decisions. There is enough uncertainty in the business and trading worlds in trying to guess markets. To have the Government throwing in more uncertainty is clearly damaging to long-term decision making and to the wealth of the economy. If it is damaging to the wealth of the economy, it is damaging to the long-term tax take for the Chancellor.

I congratulate the hon. Member for Christchurch (Mr. Chope) on having the courage to follow us into the Lobby to oppose that in practice as well as in theory. It is disappointing that it has taken until now for Conservative Front Benchers to come to the point at which we can vote against retrospective taxation together. A few of his colleagues wondered why they were not following us into the Lobby. It seemed to be a matter of presentation rather than the substance of the issue.

My recollection is that the Liberal Democrats followed a group of Conservatives, led by me, into the Lobby.

At least we were in the same Lobby.

The hon. Gentleman was perhaps too generous to the Government. He said that there might be an element of green taxation if someone decided to cancel their trip in the light of the tax change, but if the plane still flies, the environmental damage is still done. What is fundamentally disappointing about the tax is that it taxes the individual and not the actual polluter, which is the aircraft. That tax needs to be reformed anyway.

For the Chancellor to change a tax system retrospectively while we are still in the financial year, albeit towards the end of it, is extremely damaging to confidence, and confidence is what encourages long-term investment, which encourages the wealth creation from which this country will benefit in the long term.

The hon. Member for Wycombe (Mr. Goodman) made the case that the precedents published by the Treasury may not cover all the eventualities in terms of retrospective taxation or all the possible justifications for it in the future. He is probably right. Nor do the precedents allay any of the real concerns felt by the general public that they may be taxed retrospectively for things that they did that were legal at the time or, in terms of savings and investments, things that were not deemed to be avoidance schemes at the time at which they invested in them, but are now thus deemed because of misuse by others.

Concerns about retrospective changes include the possibility that they may lead to double taxation of money that has already been taxed in another way. The amendments suggest that the Minister issues a written statement and I am quite taken with that suggestion. Hon. Members will remember last year’s Finance Bill, when the Paymaster General gave a long and detailed exposition on the abuse of family trusts, to the extent that control could be maintained as the assets went through many generations in a family. Were such a detailed exposition to be presented for a specific problem that required to be taxed retrospectively, I suspect that it would allay the genuine concerns of the public and explain why the Government were seeking to make the proposed changes. It might also temper how those genuine concerns are reflected by hon. Members, and that would be a positive outcome.

On the basis that subsection (9) of new clause 2 excludes it from the Provisional Collection of Taxes Act 1968, I await with interest to learn why the Minister opposes it. It seems a sensible measure that will inform the debate on retrospective taxation in this House and, more importantly, allay the very real concerns of the general public, especially investors.

I wish to speak briefly in support of the principle of good practice for retrospective taxation enshrined in new clause 2. I draw Members’ attention to my entry in the Register of Members’ Interests.

Debating the principles of retrospective taxation reminds me of the heady days of Standing Committee D considering the National Insurance Contributions Bill. The debate revolved to a large extent around this principle and its boundaries, although, as we found out, the principle was being made up on the hoof and the boundaries were anyone’s guess. Fine wines and platinum sponges featured strongly, and they certainly made for hedonistic debate, although since the latter have a more prosaic function in catalytic converters, it is perhaps appropriate that the catalyst for new clause 2 was the introduction of retrospective environmental taxation.

I spoke then about the dangerous precedent of backdating tax changes to coincide with an expressed intention to legislate. We should not be encouraging a state of play whereby tax changes are effectively implemented by ministerial statement and then rubber-stamped by legislation at a later date. Worse still, we should not require sections of the financial services industry routinely to thumb through Hansard to check whether the Paymaster General has said anything threatening—which I know is not her usual practice, but which has occurred from time to time.

I am pleased that subsection (4) addresses specifically the practice of announcing things to Parliament and using them as the peg on which to hang retrospective taxation. It might make for convenient government, but it sends all the wrong signals.

I accept the thrust of my hon. Friend’s remarks, but does he agree that notwithstanding the joys of new clause 2, it is of doubtful value to afford to the Government discretion as to the manner of the publication of their future intentions? That leaves open the possibility that lots of people who will be affected will not get to know.

My hon. Friend makes a valid point, and it follows on from the excellent one made earlier about small businesses that do not have on their payroll the sort of people who can do the Government’s dirty work for them and identify such problems coming down the track.

I also welcome the two principles set out in new clause 2(7), which propose that the Government keep their powder dry on retrospective taxation unless it is needed to address a conflict that has arisen with “reasonable expectations”, or to guard against a new tax avoidance scheme that would lead to a loss of revenue. The Government should look again at whether it might not be timely, after 22 years of the Ramsay case, to review the distinction between legitimate tax planning and illegitimate tax avoidance.

While I do not wish to wander too far from the new clause, I hope that the Government will take this opportunity to reaffirm a commitment to certainty in the tax system. Adam Smith, the second most famous economist to come out of Kirkcaldy, wrote in his “The Wealth of Nations” that

“the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid ought to be clear and plain to the contributor and to every other person.”

That is a fine statement of principle, although it is perhaps a little too well written ever to make it on to the face of a Finance Bill.

It is a pity that none of the events that the Chancellor has sponsored at No. 11 Downing street over the years took its cue from the Adam Smith Institute, but I hope that the Government will see fit to endorse the principle underlying new clause 2.

This has been a useful debate. The hon. Member for Wycombe (Mr. Goodman) opened it and made several references to our earlier debates on this matter in relation to air passenger duty. He also quoted from House of Commons Library briefings about precedents for the proposals. In general, such briefings are very accurate, useful and reliable, but in this case I take issue with the quote that he used, although he may have done so selectively. I have given a number of precedents to explain the proposals and to demonstrate that there is nothing novel about the decisions on air passenger duty taken in the pre-Budget report. Those precedents match precisely what has happened with that duty: in each case, measures were introduced that had an effect on duty tax points before they were considered by Parliament—but after the Government had made a clear announcement to Parliament of their intention to introduce them.

I am glad that the hon. Member for Wycombe said that he was not against retrospection per se, but I remind him that the decision on air passenger duty that we announced in December’s pre-Budget report was not retrospective. It was pre-announced: the pre-Budget report documents made it clear that the new rates would apply to passengers travelling on or after 1 February. It was a departures tax, not a ticket tax or a booking tax. Of course, questions arose in respect of flights booked before 6 December, when my right hon. Friend the Chancellor made his announcements, but airlines had two months’ notice before the new tax rates came into force. The airlines have been liable for the air passenger duty since 1993. They are responsible for its payment and free to choose—as they did in February—whether and how to pass their costs on to passengers.

The Financial Secretary cannot argue that a tax is not retrospective just because it was pre-announced. The rise was voted on as part of the Budget resolutions, and will be voted on again during the course of this Finance Bill, but it is backdated to February.

The provision was not retrospective, but it is true that it applied to tickets booked before as well as after the announcement on 6 December, just as air passenger duty applied when it was first introduced in 1993, as did the changes made to the duty in 1996 and 2000.

My hon. Friend the Member for Bishop Auckland (Helen Goodman) did not look too disappointed when I broke the news that she was not to be a member of the Finance Committee this year. However, we missed her during the six weeks we spent scrutinising the Bill and discussing it in detail.

I respect the way in which the hon. Member for Christchurch (Mr. Chope) again raised the retrospective taxation issue. He is absolutely assiduous in doing so, and not just in the Chamber; he and I have debated the issue in Westminster Hall, too. His arguments seem to be making more headway on his Front Bench than on the Treasury Bench, although he and his Front-Bench colleagues obviously do not entirely see eye to eye on green taxes and environmental policy in general. The hon. Gentleman is right: his Front-Bench colleagues did not support him when he moved a similar proposition on air passenger duty in the Committee of the whole House. However, they seem to be lining up to support him on this occasion. Perhaps we should not be surprised—we are getting used to rapid and dramatic shifts of policy position on the Opposition Front Bench.

The hon. Member for Falmouth and Camborne (Julia Goldsworthy) referred to agricultural buildings allowance and the trust legislation—concerns that were also mentioned by the hon. Member for Dundee, East (Stewart Hosie). I encourage the hon. Lady to consider that there could be no legitimate expectation that the law relating either to agricultural buildings allowance or to the taxation of trusts would remain unaltered indefinitely. The right hon. Member for Wokingham (Mr. Redwood) touched on whether the trusts legislation was retrospective. The tax changes on the treatment of trusts were not retrospective; they may, and do, apply to trusts that have been previously established, but only for future years. That is not retrospection in any serious sense of the word.

New clauses 2 and 7 would restrict the use of retrospective tax law far beyond existing domestic and European Court of Human Rights precedents and would have effect in respect of a wider range of tax provisions than Members might realise. New clause 7 in particular would severely restrict the Government’s ability to react to changing circumstances to protect the Exchequer.

Let me stress that the Government take the use of any retrospective tax law extremely seriously. Before introducing the Finance Bill to the House of Commons, the Chancellor is required to certify that it is compatible with the European convention on human rights, which he does only after he has sought advice from Her Majesty’s Revenue and Customs and other departmental lawyers. That ensures that every provision in the Bill is scrutinised carefully and an assessment is made as to whether it complies with the rights conferred by the convention.

As Members will be aware, the main constitutional conventions on retrospective tax law are known as the Rees rules, which require a Minister to make a full announcement to the House when introducing fiscal changes that have effect on a date before the enabling legislation will be enacted. Over the past 10 years, the Government have used and followed those rules, just as previous Governments did on many occasions.

The hon. Member for Wycombe referred to the statement made by my right hon. Friend the Paymaster General in 2004 when she set out an approach to tax avoidance schemes—tough but necessary arrangements—that were subsequently supported on both sides of the House. I think that all hon. Members might concede that tax decisions often have to recognise a wide range of economic, social or environmental factors, and sometimes we face factors that change rapidly and constantly. Of course, those factors have to be balanced with the need for certainty and the need to respect the rights of taxpayers to understand their position—including compliance with the provisions of the Human Rights Act 1998. We are satisfied that the balance that we have built into the current parliamentary framework is sufficient to deal with the situations we face.

As the hon. Member for Wycombe explained to the House, new clause 2 seeks to enshrine in legislation elements of existing convention and best practice. New clause 7 seeks to go further than new clause 2 and rows back from existing convention and best practice. Together, they would restrict the ability of the tax system to respond to changing circumstances and, on occasions, to avoidance threats. New clause 7 seeks to impose wholly impractical restrictions by making it a duty of Treasury Ministers not to bring before Parliament retrospective tax provisions, whether in the Finance Bill or otherwise, that do not comply with certain conditions set out in the clause.

How can the Minister say that the provisions would cause problems with tax avoidance when new clause 2 specifically allows the Treasury still to take action to deal with tax avoidance?

If the right hon. Gentleman will bear with me, I will come on to the sort of problems that would be caused by the flawed way in which the provisions in new clauses 2 and 7 are framed.

There are many precedents, going back many years, for Acts of Parliament and resolutions that take effect from dates before the date on which they are debated and voted on by the House. Subsections (7) and (8) of new clause 2 set out conditions under which retrospective tax law would be compatible with subsection (1). Subsections (2) and (3) of new clause 7 set out the same conditions under which retrospective tax law could be introduced in accordance with subsection (1). The first condition is that some event—most likely a court judgment—has changed the interpretation of the law contrary to “the reasonable expectations” of “tax practitioners”. That phrase is defined in new clause 2(8) and new clause 7(3). A moment’s thought would encourage one to conclude that it would be extremely difficult to determine what the reasonable expectations of such a diverse body as tax practitioners would be.

The second condition in both new clauses is that a scheme has been disclosed to Her Majesty’s Revenue and Customs. I think that this is the point that the right hon. Member for Wokingham was making. However, although the term “tax avoidance scheme” appears in the titles of the legislation referred to in the new clauses, it is not defined anywhere in UK legislation. The descriptions used in primary legislation—principally in part 7 of the Finance Act 2004—and in regulations are targeted at avoidance, but they do not define it. In effect, they are proxies for new and innovative schemes, as these often carry the highest risk of avoidance. But not every scheme that is notifiable is avoidance and, equally, since the descriptions must strike a balance between countering avoidance and imposing unnecessary or burdensome responsibilities on business, they will not capture every avoidance scheme.

New clause 2(6) and new clause 7(7) would further give the provisions effect in situations where the tax change may affect a pricing decision that has already been made by a company, even when the measure applied only to tax points that occurred after the measure had been passed by the House. It cannot be the case—although it appears to be from the way in which the provisions are framed—that hon. Members seriously propose that the House should be alerted in any case in which a change to tax rates has an impact on a commercial decision or arrangement that has already been entered into. Again, a moment’s thought would lead one to suggest that that might apply to virtually any tax change. In general, any tax change has the potential to have an impact on such decisions.

It is difficult to envisage why the provisions are necessary. The Chancellor must certify that any retrospective measure is human rights-compatible. Parliament has the ability to consider all the factors raised in the new clauses when debating such a measure. The drafting of the new clauses is fundamentally flawed. The measures would have far wider consequences than even the hon. Member for Christchurch might intend. Following the reassurances that I have given, I hope that neither of the new clauses will be pressed to a Division. If they are, I shall have to ask my hon. Friends to resist them.

The debate has demonstrated the widespread concern throughout the House about creeping retrospection, as was evident from the comments made by my right hon. Friend the Member for Wokingham (Mr. Redwood) and my hon. Friend the Member for Braintree (Mr. Newmark). The hon. Member for Falmouth and Camborne (Julia Goldsworthy) reminded the House of a point that I omitted to make: the issue of retrospection was very live when we considered trusts during our proceedings on last year’s Finance Bill. The hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) also made that point. The hon. Member for Dundee, East (Stewart Hosie) was sympathetic to new clause 2. To borrow a phrase from my hon. Friend the Member for Christchurch (Mr. Chope), we are seeing a large pincer movement on the Government.

I pay tribute to my hon. Friend the Member for Christchurch, who strongly opposes the rise in air passenger duty. He is also concerned about retrospection and I am grateful to him for pressing the issue in such a way.

My hon. Friend was right about the pincer movement on the Government because the hon. Member for Bishop Auckland (Helen Goodman) said shortly after I finished my speech that she opposed new clause 2, but that her opposition would be justified retrospectively. That set the tone for the debate. She has been joined on the Labour Benches by the hon. Member for Wolverhampton, South-West (Rob Marris). He is in the Chamber retrospectively, given that he was here in spirit right from the start of the debate.

The Financial Secretary, like the hon. Member for Bishop Auckland, produced a scant argument. He says that the considerations already apply and that new clause 2 is badly drafted, but subsection (1)(b) of the new clause would allow him to introduce any measure and simply claim that it would be justified, despite being retrospective, for the reasons that he wished to set out to the House. However, he did not address that point at all.

Having heard the Financial Secretary’s argument, if new clause 2 were agreed to, I would be happy to accept amendments (a) and (c) to it, which were tabled by my hon. Friend the Member for Christchurch. I would look sympathetically on new clause 7, which he also tabled. We will press new clause 2 to a Division.

Question put, That the clause be read a Second time:—

New Clause 4

Duty on HMRC to expedite VAT registration and repayment applications

‘(1) It shall be the duty of HMRC to determine applications for—

(a) registration for VAT, and

(b) repayment of VAT by HMRC

within a maximum period of days from the receipt by them of the relevant application.

(2) The Treasury must by Order specify the maximum period mentioned in subsection (1), having first consulted HMRC and persons representing small businesses.

(3) If an application of a kind mentioned in subsection (1) has not been determined by HMRC before the expiry of the maximum period specified by the Treasury in accordance with subsection (2), the applicant may apply to the Special Commissioners for a declaration that the application is deemed to have been approved by HMRC.

(4) The Special Commissioners must grant an application for a declaration under subsection (3) unless they are satisfied that HMRC has reasonable grounds for having failed to determine an application in accordance with subsections (1) and (2).

(5) Grounds shall be treated as reasonable under subsection (4) only if they relate to circumstances beyond HMRC’s control.’.—[Mr. Gauke.]

Brought up, and read the First time.

Before I deal with new clause 4, let me say a few words about Government amendment No. 2 and return to the comments made by the Financial Secretary earlier. As he said, on my debut on the Front Bench in Committee, he generously agreed to amend the Bill to require an affirmative resolution where the joint and several liability requirements are to be extended, as in clause 97. He has been as good as his word, and I welcome the amendment.

New clause 4 would require that the Treasury, in consultation with Her Majesty’s Revenue and Customs, specify a maximum period for HMRC to determine an application for VAT registration or VAT repayment. If it were not determined within the period specified, the applicant could apply to the special commissioners for a declaration of approval to be granted, unless the commissioners determined that HMRC had reasonable grounds for failing to determine the application. The reason for tabling the new clause is the widespread and growing concern that VAT applications, whether for registrations or repayments, are taking substantially longer than previously, and substantially longer than the target times specified by HMRC.

I should say at the outset that I recognise that part of the reason for the delays is action that is being taken to try to tackle missing trader intra-Community—MITC—fraud, which has a substantial cost. We recognise and support the Government’s view that action needs to be taken. We also accept that, in fighting MTIC fraud, there is a role for ensuring that only legitimate companies become registered for VAT and only companies with clean hands receive VAT repayments. I have received some representations stating that the VAT registration process should have been tightened at an earlier stage in order to address the issue.

It is not our intention to disrupt attempts by the Government to tackle MTIC fraud. Indeed, new clause 4 is so drafted that if HMRC had good reason for delaying a registration or repayment it would be able to do so, and of course tackling fraud is a good reason. However, I hope that the new clause will give us a chance to explore whether the problems with registration and repayment are entirely due to MTIC fraud, and whether the balance is right between tackling fraud and ensuring that legitimate businesses are not harmed and that their activities are facilitated. I also hope to explore the question of whether there is any prospect of an improvement in performance by HMRC in this area. I will listen carefully to what the Financial Secretary says when he responds, and if he persuades me that the new clause would harm efforts to tackle MITC fraud, I will not press it. None the less, we wait to hear those arguments.

Essentially, there are two closely related problems: VAT registrations and VAT repayments. This is not a new issue. I raised the question of VAT registrations last summer in the Standing Committee on last year’s Finance Bill. I subsequently raised it with senior HMRC officials when I was a member of the Treasury Committee and they gave evidence on HMRC’s performance to the Treasury Sub-Committee. It is worth looking at the evidence that they provided. Paul Gray, the chairman, stated that VAT registrations was

“one of those areas where we have had probably the greatest degree of pressure and the performance certainly was not as good as I might have hoped”.

His colleague, Mike Eland, added:

“it is trying to get a balance between facilitating legitimate business and tackling fraud. We did not get that quite right. We put the emphasis on tackling the fraud. We are now looking to correct it the other way by simplifying some of the procedures and also getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly”.

Mr. Gray and Mr. Eland stated that HMRC was improving but was “not there yet”.

My hon. Friend is making a good case. Could he give me some idea of the length of time for which he thinks it reasonable for Revenue and Customs to delay considering an application?

I am grateful to my right hon. Friend. I will deal with some of these points in more detail in a few moments. HMRC’s standard target is 21 days —15 working days. There may well be circumstances in which additional time is necessary, but at the moment there are regularly delays of three, four, five or six months. That is unacceptable.

Let me consider some of the performance figures. HMRC accepts that last summer’s performance was unacceptable. In June 2006, 109 complaints were made, and in July 2006 the figure was 96. I have the most up-to-date figures from answers to parliamentary questions, which show that the number of complaints had increased to 131 in April 2007 and 133 in May 2007.

Perhaps the most important figure is the percentage of applications that were processed within 21 days of receipt. In May, June and July 2006 it was 56, 57 and 57 per cent. respectively. Again, the most up-to-date figures that I have are from parliamentary answers. Although in January HMRC officials were looking for a substantial improvement, and recognised that there had been a problem the previous summer, the figure was still a mere 60 per cent.; anecdotal evidence suggests that it may have declined since then. However, even if 60 per cent. of applications are tackled within the 21-day target period, that means that of approximately 280,000 VAT applications a year, some 112,000 are not tackled in that time. That is a substantial number. Given that I believe that the target has been missed by some margin, we are talking about a reasonably major issue.

The concern was further highlighted last week in an article that John Arnold, the chairman of the tax faculty of the Institute of Chartered Accountants in England and Wales, and Neil Gaskell, its technical manager, wrote. Their introductory remarks are worth quoting:

“At the Tax Faculty we know that the continuing and unacceptable HMRC delay in processing new VAT registrations is the biggest single VAT issue facing our members and their clients.

Some registrations are taking over six months to obtain. Smaller businesses are faced with cash flow problems because, without a VAT number, they have difficulty in getting their invoices paid. Larger businesses find restructuring or acquisitions held up; and for everyone, property transactions are delayed if the purchaser needs to become VAT registered”.

They go on to argue that accountants have been running up approximately £100 million worth of chargeable time as a consequence of trying to deal with HMRC’s inefficiencies and errors. They estimate that only 20 per cent. is passed on to clients. None the less, the problem affects accountants and clients.

How bad is the problem according to HMRC? Mr. Arnold and Mr. Gaskell state in their article that HMRC claims that 95 per cent. of applications are processed within 30 days; I remind hon. Members that the target is 21 days. Let us consider the assessment that the accountants make of the various VAT registration offices. They note that Newry takes 30 days, and Wolverhampton takes 34 days to open applications. Performance appears to be slightly better in Carmarthen, but there are no details. Hon. Members should note that we are considering the time taken simply to open applications.

The accountants’ article refers to HMRC’s figure of 30 days, although an article in last week’s Financial Times cited 38 days. Does that figure mean that processing takes place 30 days from receipt, or 30 days from opening applications? If it is taking more than a month simply to open applications, we are contemplating serious problems. As Mr. Arnold and Mr. Gaskell say, it suggests that the 30-day claim is somewhat “misleading”.

One of the problems that the tax faculty article identified is the large increase in the number of applications for VAT registration, which the Government’s legislation on managed service companies has caused. I am sure that we will revert to that subject later because it has caused a substantial increase—approximately 20,000—in applications. The VAT application officers have simply been unable to cope with that.

The issue raises several questions, and I would be grateful if the Financial Secretary could answer them. Do the Government accept that performance in dealing with VAT applications is declining? Does the Financial Secretary have any further up-to-date figures? Does he maintain that 95 per cent. of cases are tackled in 30 days, or 38 days? Does that time run from receipt of applications or opening of applications?

The accountants have raised concerns about the closure of the Newry VAT office. What will be the effect of that? HMRC appears to have acknowledged that it will cause further delays. What steps did HMRC take to mitigate the problems that the proposals for the managed service companies caused? Was it anticipated that they would cause an increase in VAT applications? What was done to tackle that? Are the problems exacerbated by attempts to reduce HMRC staff? Is that a wider problem in HMRC? Are legitimate companies that are trying obtain a VAT registration feeling the impact of attempts to reduce staff? How targeted are the problems relating to VAT registrations at companies that are in high-risk areas for missing trader intra-Community fraud? The problem appears to be much greater than simply a handful of companies in key high-risk areas, such as mobile phones or specific electronic goods.

The second cause of concern is VAT repayments. In Committee, I provided several examples of difficulties with VAT repayments. Again, there is clearly a relationship with MTIC fraud; indeed, it is even stronger. The system of extended verification, which has caused delay in several cases, is undoubtedly an attempt—on the face of it, a successful attempt—to tackle MTIC fraud.

Two statistics are wheeled out. First, in 95 per cent. of cases in which traders are subject to extended verification, participation in or profit from MTIC has been found, or sufficient suspicion exists to warrant further investigation—“sufficient suspicion” in the opinion of HMRC, presumably. There is a distinction between cases in which someone subject to the extended verification system has been found to participate in or profit from MTIC fraud and those in which sufficient suspicion exists. Is it possible to break down the figure of 95 per cent. to ascertain how many traders fall within each category?

The second figure that HMRC uses is the 1 per cent. of withheld VAT, which is subsequently found to have been correctly claimed and properly payable. The test of “correctly claimed and properly payable” is higher than that for being involved with MTIC fraud. I sought further clarification through parliamentary questions without success about whether it could be argued that an element of the VAT funds that are not being repaid do not relate to MTIC fraud but to a technical, perhaps minor, breach of the claim form. I should be grateful for that further clarification.

There is a concern that staffing underlies many of the problems, especially those with VAT registration. In Committee, I raised the case of Viking Garages, and a professional adviser to the company pointed out, in connection with VAT repayments:

“HMRC are putting woefully inadequate resources to the team responsible for authorising repayments” .

Do the Government recognise that there is a problem, and a staffing issue? If so, what steps will they take to improve the position?

Both issues hamper legitimate business. There is concern that the delays are preventing us from dealing accurately with MTIC and from taking well-targeted action, but there is broader anxiety that the legitimate needs of legitimate business have not been facilitated by HMRC. New clause 4 highlights and attempts to address those concerns. For 12 months, professional bodies and members of the Conservative party have sought to improve something that HMRC has recognised is a serious problem. I hope that the Financial Secretary accepts that there is a problem, and will provide reassurance that those concerns will be addressed.

I support the powerful case made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) for new clause 4, particularly on the repayment of VAT. Some 1.8 million businesses are VAT- registered, and they submit 7.6 million assessments each year. In the year ending March 2006, 85 per cent. of those assessments were paid on time, which means that a substantial number were not. The new clause would assist the Revenue in sharpening up its act, and would both help it to catch up with those who have not paid their VAT bill on time and ease the burden on businesses that have not received their repayments on time. In the absence of such a provision, the Revenue has paid insufficient attention to the efficiency improvements that are needed following its combination with Customs and Excise.

The Revenue is quick to fine businesses that do not submit their returns on time. Indeed, if a business is two weeks or more late in filing its return, a default fine is automatically imposed. In the year ending March 2006—the latest year for which figures are available—the Revenue issued 250,000 late filing penalties, which is an increase of 10,000 on the previous year. The total value of VAT-related penalties earned by the Revenue that year was £270 million. That is a significant source of tax revenue, which HMRC could clearly increase, given the proportion of fines that have not been paid. However, there is an imbalance, as HMRC’s performance in refunding overpayment is not subject to anything like such rapid equivalency. Indeed, businesses can apply for compensation only once an inquiry launched by HMRC into VAT irregularities is completed. As we heard from several hon. Members in Committee, that may take a very long time indeed, even for businesses that trade legitimately and supply the information requested by HMRC. They do not receive such payments as a result of HMRC’s inefficiencies.

I am dealing with a constituency case that involves a company whose VAT payment for March 2006 is under investigation. It was not notified of the investigation until six and a half months later, in mid-October. An overpayment had been made, so the Revenue may have suspected MTIC fraud—indeed, it transpires that that was the case—and it launched an inquiry. Fourteen months later, the company is still waiting for the inquiry to conclude. There is a catalogue of errors in HMRC’s systems, with which I will not bore the House—but to illustrate the challenges facing companies I should explain that that business, having failed to receive a refund of the significant overpayments in its March return and its subsequent May return, received a demand from the Revenue regarding the non-payment of corporation tax. The Revenue decided to pursue the company through the courts for the tax, which amounted to roughly 20 per cent. of the VAT overpayment due to the company. The company got into cash flow difficulties as a result of the Revenue retaining its funding, and business more or less ceased. It was only as a result of my intervention with Mr. Gray at HMRC that the Revenue backed down from its demand for corporation tax and stopped pursuing the company into liquidation through the courts. Fourteen months later, however, despite repeated correspondence with Mr. Gray on the company’s behalf, there is no resolution in sight.

If the Government accepted the new clause, the Revenue would be obliged to report regularly on its performance, so it would have a salutary effect both on the way in which HMRC chases up people who default on payments and on cases in which overpayments have not been refunded. As a final illustration, may I rehearse for the House a point that I made in Committee about online filing and HMRC’s woeful performance in meeting its own targets? By March of this financial year, HMRC aims to achieve a target of 50 per cent. of VAT returns filed online. As of March—the end of the last financial year—only 9 per cent. of returns were filed online. The new clause would encourage substantially greater efficiencies in HMRC, so it should be supported.

I shall be brief, because the hon. Member for South-West Hertfordshire (Mr. Gauke) outlined very clearly a significant problem in VAT registration and repayment. It is important to underline the impact of such problems on businesses. Hon. Members have given examples of businesses that have ceased trading as a result of delays, so we should not underestimate the problems on the ground. As always, it is difficult to balance the interests of law-abiding businesses with the need to tackle the fraudulent endeavours of people trying to cheat the system. Liberal Democrats have always made it clear that they are sympathetic to the Government’s efforts to tackle the issue. MTIC fraud is a significant problem that costs the Treasury billions of pounds a year, so we support the Government’s efforts to introduce a reverse charging system to overcome it.

I am sympathetic to the intention behind new clause 4, but I wonder whether it is too bureaucratic. If HMRC officials are already struggling to deal with repayment applications, the provision might make the spiral even worse. If I have any hesitation, it is about the fact that the proposal may be more time consuming for officials who are struggling to cope with the new measures that have been introduced as a result of reverse charging and the verification process. They are trying, too, to cope with restructuring and staff cuts, which have had a wider impact on the system. I should be grateful if the Minister told the House the average time that it takes an HMRC official to process applications for repayment and to deal with verification.

Finally, I do not know whether the Minister will accept the new clause, but businesses are seeking genuine assurances from him that the wider HMRC reforms and efficiency changes will not have a negative impact on their ability to complete the VAT verification process or to seek repayment. Efforts to counter MTIC fraud should not affect law-abiding businesses. Above everything else, with respect to the hon. Member for South-West Hertfordshire, who tabled the new clause, ultimately that is what small businesses seek from today’s debate.

Business is looking for greater speed and greater co-operation from all parts of Government, and I am delighted that my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) has highlighted the need for improved performance in the important area of VAT refunds and VAT registration. The asymmetry has already been illustrated in one respect. If a business files late, there is an automatic penalty. If the Revenue and Customs is late in returning, that is bad luck on the business concerned.

There is another asymmetry that is relevant and extends more widely across Government: the asymmetry between the standards now expected of a world-class business in terms of error and delay, and the standards that we have grown used to expecting from Government. A world-class business would think it bad to have an error rate as high as 0.1 per cent., and it would expect very little delay in service or product delivery to its customers, yet we are discussing an organisation where 40 per cent. of the initial registrations and 14 per cent. of the refunds are delayed. Those are massively large figures representing millions of cases of late refunds over a reasonable period, which would not be acceptable in the private sector.

It is the Government’s job and a Minister’s task to engage with senior officials and administrators to try to lift Government standards to something like those that world-class competitive businesses must hit or go out of business. As we have heard, small businesses and some big businesses can be extremely embarrassed if an important refund is much delayed, because they budget their cash flows to very fine tolerances. If a large cheque from Revenue and Customs is missing, that can make a big difference to the business’s future and therefore to the jobs represented by that business.

I thought that I had left VAT returns behind when I moved from business to politics, although as the Financial Secretary knows, I maintain a keen interest in VAT issues as HMRC has three main buildings in the constituency that I represent, two of which deal with VAT issues. With reference to my local VAT office, I have had a number of discussions about job cuts in HMRC, and from the Front Bench my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) expressed concerns about the impact of job cuts on already worrying performance figures. I support new clause 3 in particular, as it is right that we examine the performance figures in detail.

My second point involves a recent constituency case. A constituent recently visited me who was concerned that an internet-based competitor was selling goods without paying any VAT. I wrote to the Financial Secretary, who took the matter extremely seriously, although for understandable reasons he wrote back to say that he could not correspond about a third company and reveal details. From my investigation of the matter, there seems to be concern in the industry that, because of carousel fraud, the performance figures of HMRC were adversely affected. That was affecting not only repayments and the processing of applications, but other fraud issues relating to VAT. I should appreciate reassurances from the Minister that non-carousel fraud is being investigated equally and that resources are not being sidetracked because of carousel fraud.

Finally, in my discussions with a number of people about the case that I mentioned, concerns were raised that managed service companies are submitting thousands of new companies for VAT registration on a daily basis. Can the Financial Secretary allay my concerns or put a number on the VAT applications coming through daily and monthly? Will he confirm reports that up to 20,000 applications in bulk have been submitted to HMRC in one day? That would explain some of the performance figures and performance concerns.

When the issue of timely VAT repayment was raised in Committee in the context of MTIC fraud, the Financial Secretary commended me for speaking with some passion on the subject—at least, I think it was a commendation. It will come as no surprise to him, then, that I want to return to it.

As my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) told the Public Bill Committee, the problems with timely VAT registration and repayment have been a matter of some interest to the Treasury Committee. The acting chairman and the director general of enforcement and compliance at HMRC both admitted to the Treasury Committee that VAT registration was an area in which HMRC was under considerable pressure.

However, my interest, or rather my passion, stems from the fact that I have seen the effect that the pursuit of MTIC fraud can have on a business when it causes significant delay in VAT repayment. I therefore welcome new clauses 3 and 4, because they both improve parliamentary oversight and introduce some form of benchmarking in HMRC’s treatment of VAT. However, the first depends on the second if it is to be effective. The value of scrutiny depends, to a large extent, on the existence of benchmarks and standards of reasonable behaviour. That is particularly important in respect of MTIC fraud.

First, there is a consensus that tackling MTIC fraud is necessary and beneficial. However, the unintended consequence of that consensus is that scrutiny becomes more challenging, because we must be careful that an attack on the effectiveness of the repayment system is not construed as an attack on anti-avoidance itself.

Secondly, the Government are fond of telling the House how fiendishly complicated MTIC fraud is and how HMRC is engaged in a running battle to outwit its perpetrators. The reasoning is that complication justifies delay. The logical outcome of the endless race between fraudsters and HMRC is that as complication increases, so must delay. That was the essence of the Financial Secretary’s argument in Committee. He told me:

“Given the complexity involved, it is not surprising that the process of focusing on the trading patterns or traders that we suspect are most at risk can take some time.”––[Official Report, Finance Public Bill Committee, 7 June 2007; c. 492.]

Nevertheless, there remains a point at which delay becomes unreasonable and unjustifiable, whatever the worthy objective behind it. The Financial Secretary cited a figure of 12 months for the completion of verification checks which had been accepted by the courts. If that is truly a reasonable and justifiable delay, let the Treasury specify it in an order, or let HMRC print it in a glossy brochure so that businesses know what to expect.

Thirdly, the Financial Secretary argued that HMRC’s record on MTIC fraud is very good, showing that the Government’s strategy on MTIC fraud is well focused. He cited the figure that we heard earlier, that only 1 per cent. of the VAT that had been withheld because of verification was found to be correctly claimed and repayable, but that statistic will be of little comfort to those who are caught up in investigation, and it has no direct bearing on whether HMRC can agree a timetable for verification and then stick to it.

I raised the issue in Committee because I was worried that HMRC might lack the resources that it needed to cope with the scale of MTIC fraud. Publicised time scales for VAT registration and repayment would assist resource management within the organisation. It would also be invaluable to businesses that rely on prompt VAT repayment in order to maintain a healthy cash flow.

One of my constituents was a director of a firm that was caught up in an MTIC fraud investigation. My constituent’s company supplied mobile phones, and it had exports totalling £60 million in 2006. It waited some 10 months for a VAT repayment claim of £6.7 million to be met while “extended verification” procedures were carried out on its supply chain. Unfortunately, that wait did not have a happy outcome; on 17 January, the company went into administration due to the significant dent in operating cash flow represented by that £6.7 million, which is a substantial sum for a company with a £60 million turnover.

It is unfortunate to say the least that any company should be driven to the wall in those circumstances. I do not wish to second-guess HMRC’s judgment on that particular case, but I do question the process. I suspect that the uncertainty of living month to month while investigations were carried out was the final straw for my constituent. He also told me that he did not think that any investigation was going on for much of those 10 months, as few of his suppliers were even contacted.

Proposed subsection (3) of the new clause would ensure that HMRC had an incentive to get a move on, since running out of time would result in a determination in favour of the application. It is better that HMRC should run out of time than a company should go to the wall or go bust having run out of money. What the new clause does not do is prescribe a reasonable time scale. It is quite right that HMRC should, informed by all the relevant operational considerations, advise the Treasury on an appropriate time scale. Once in place, however, that time scale would introduce some accountability and get companies that are being investigated for MTIC fraud out of limbo.

My final word is a note of scepticism on proposed subsection (5) concerning force majeure. As we heard earlier, Mr. Eland, the director general of enforcement and compliance at HMRC told my hon. Friend the Member for South-West Hertfordshire that HMRC was

“getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly.”

Given the Government’s woeful record on IT projects, I hope that the routine IT failure will not be brought within their ambit under force majeure.

We have had yet another good debate on the challenges facing HMRC and the Government in tackling some of the systematic and very serious fraud perpetrated against our VAT system. I welcome the support that hon. Members in all parts of the House have given us in that regard. We have also had a useful debate, as we have done previously during the Bill’s passage, on some of the problems that are evident and that senior HMRC officials and I have recognised and are concerned about in relation to delays in VAT registration and repayments. I shall come in a moment to the provisions in new clause 4, which I do not think will help deal with those problems. Nevertheless, given the scale of the work that HMRC does and the intense impact and difficulties that can be caused for individual companies, it is appropriate that we debate these matters on the Floor of the House.

The hon. Members for Ludlow (Mr. Dunne), for Rochford and Southend, East (James Duddridge) and for Braintree (Mr. Newmark) all mentioned particular constituency companies. If each of them separately would like to give me the names of those companies, I shall consider the cases. I shall check on the present position of the company raised by the hon. Member for Ludlow and ensure that he receives an update, and I shall do the same for the hon. Member for Rochford and Southend, East, whom I can reassure in passing that carousel fraud in the VAT system is a major concern, although our vigilance on other forms of VAT fraud continues. If the hon. Member for Braintree can let me have the name of the company—we have discussed it before and I have caused inquiries to be undertaken, as I undertook to do—for the purposes of taxpayer confidentiality and to ensure that I have the right company, I can, with that confirmation, get back to him on the current position.

I appreciate the Financial Secretary’s comments, but the spirit in which I was trying to make my points was not so much about the case itself as about the process that it had to go through, which lasted rather a long time. That was the thrust of my argument, rather than the rights and wrongs of HMRC’s judgment on my particular constituent’s case.

I appreciate that, and even where the hon. Gentleman has been very critical of the Government in the thrust of his argument, I accept the manner in which he has put it.

The hon. Member for South-West Hertfordshire (Mr. Gauke) asked me for specific information on certain important aspects. Let me try to deal with them at the outset, after which I shall come on to the proposals set out in the new clause. First, claims that registration applications have not even been opened are simply not true. Post received by the registration units is opened on the day of receipt. The timetable against which HMRC attempts to manage its operations, which it monitors and then is judged against, counts from the point of receipt of the form.

On repayments, the hon. Gentleman said that he had been pressing for more information and a breakdown of some of the figures that he and I have discussed previously. In particular, I refer to the process of verification of repayments that may have been linked to MTIC loss where there are grounds for further investigation. In a third of those cases—or, if he likes, 95 per cent. by value—there was firm evidence of links to such fraud. In two thirds—by number, but not value—there are strong indications of such links, warranting further investigation. I hope that that helps him with his question.

The hon. Gentleman asked about the closure of the Newry office, and indeed about the proposals to close the Carmarthen office as well. That is part of a long-term process of making sure that, as in other parts of government, we can deliver the services that are required—by taxpayers, in this case—better, but do so more efficiently with the resources that we have. That is part of a long-term process of reducing delays and backlogs. Increasing capacity at Wolverhampton and Grimsby will ensure that there is no need in future for four processing sites. Clearly, however, the capacity is not there yet and Newry will not be closed until capacity in the other centres has been increased.

I welcome the hon. Gentleman’s response to Government amendment No. 2, which changes the procedure for this House in considering Treasury orders relating to joint and several liability provisions for VAT. In future, both types of order will be subject to the affirmative procedure.

Let me turn now to the new clause and concerns about registration and repayments. I understand the concerns and I recognise that problems have been caused to some legitimate businesses, but I think that hon. Members on both sides of the House have also recognised the necessity of the action that HMRC has to take to try to counter what is a very serious and systematic form of fraud. We already have a good deal of scrutiny of HMRC’s performance in these fields, and there are also well-established arrangements for judicial challenge, should that be required. I hope that the hon. Gentleman will accept that his new clause is not necessary and may risk causing complications and further problems.

There must be agreement across the House that, as well as delivering the highest possible quality of service for compliant and legitimate businesses, it is important for HMRC to guard against the threats of fraud and attack. The House is well aware of the scale of that threat; its impact on VAT receipts was estimated at between £2 billion and £3 billion in 2005-06. The House is also well aware of the range of measures that the Government have taken to stem those losses. I am confident that the combination of those measures, together with the work of HMRC officers in tackling the fraudsters, is beginning to have a significant impact on the scale of MTIC fraud losses.

In 2006-07, 7,100 applications for registration were refused on the grounds that they were suspect, and 2,500 applications were registered with specific conditions such as financial security. It remains the case, however, that the two key components of HMRC’s MTIC strategy must be, first, to prevent bogus businesses from obtaining a VAT registration, because without that it is not possible to operate that form of fraud, and, secondly, to verify that VAT repayment claims suspected of arising from the supply chains affected by that type of fraud are properly checked and verified.

VAT-registered businesses submit about 2 million applications for repayment every year, which is worth between £50 billion and £55 billion. The House will accept that it is only right that those returns are subject to certain credibility checks before payment is made. Just 10 per cent. of all repayment returns fail those credibility checks and are therefore selected for further checking—in other words, nine out of 10 returns are not selected for further checking. A tiny fraction of those claims is suspected to be linked to MTIC fraud and is therefore subject to a highly targeted process of extended or in-depth verification.

The verification of suspect repayments that may be connected to MTIC fraud can be complex and time-consuming, not least because such organisations deliberately make it time-consuming to check their complex supply chains. I am glad that Opposition Members accept that only 1 per cent. by value of the VAT withheld under that programme has been found to be correctly claimed and properly payable. In 19 out of 20 cases in which traders have been subject to extended verification, HMRC has found either evidence that traders have participated in or profited from trading linked to MTIC fraud or sufficient grounds for suspicion that further investigation is required to determine the veracity of the claim.

As VAT registration is clearly the entry point to MTIC and other types of serious VAT fraud, it is right that we take stringent action to deny fraudsters the opportunity, where we can. That includes rigorous pre-registration checks, which can cause delay. However, the picture behind the performance of HMRC on VAT registration is rather more complex than that. Historically, the delays in registration have been largely due to incorrect or incomplete applications, and the introduction of a new form in December last year made registrations easier to complete accurately—the number of people who get their applications right first time has increased from 30 per cent. to around 70 per cent. The assessment procedures around registration have become more targeted, and they have also become more flexible as we have detected changing risks. Nineteen out of 20—95 per cent.—of applications are now cleared for registration after an initial check, and for those applicants the average time to process an application is currently 38 days. I acknowledge, however, that there are also some unacceptable delays in the registration service at the moment.

The hon. Member for South-West Hertfordshire cited Mr. Paul Gray, the HMRC chairman, and Mr. Mike Eland conceding that point before the Treasury Committee and asked what steps HMRC is taking to tackle those delays. First, a taskforce has been set up within HMRC further to concentrate on the highest risk applications to minimise the disruption caused to other legitimate applications. Secondly, the maximum resource possible has been committed to introducing the medium-term changes to concentrate registration staff and expertise in two sites rather than four. Thirdly, there has been a concentration on making the necessary improvements to the computer system. I recognise that it may take some time to get those measures precisely right. HMRC has told me that it is confident that by the autumn it will be on track to deliver a sustained improvement in the registration service that serves taxpayers’ needs while remaining tough and strong on fraud. On top of the undoubted pressure with which HMRC is dealing, Opposition Members have proposed a new obligation, which could cause further problems.

There is an established series of regularly and properly used procedures in this House for holding HMRC to account and for HMRC to report to this House, and there are a number of judicial safeguards and methods of redress for companies that may require them. In the end, HMRC is, of course, subject to judicial review for its actions, and it is noteworthy that the courts have consistently supported HMRC’s verification approach, including checks made in the past 12 months. To date, all cases reaching a full hearing in the courts have been dismissed.

I submit that HMRC has recognised the drop in the proper and rightfully expected performance on registrations and that steps are being taken to rectify the situation. The fact that that is a temporary dip in performance levels and that the Government will implement public service agreements to ensure that the situation is effectively monitored and scrutinised in the future mean that new clause 4, which would give the Treasury the power to propose statutory time limits for processing VAT registration and repayment applications, would be counter-productive. In the context of a VAT registration service that is currently under pressure and that is dealing with temporary problems, new clause 4 is a disproportionate overreaction. As the hon. Member for Falmouth and Camborne (Julia Goldsworthy) has rightly pointed out, it might have the perverse effect of tying up HMRC in unnecessary bureaucracy and litigation at a time when all of us want it operationally to sort out the problems and delays on registration and to maintain the pressure on VAT fraudsters.

I hope that I have been able to give the hon. Member for South-West Hertfordshire and the House the reassurances that they have been looking for. I therefore hope that the hon. Gentleman will not consider it necessary to press new clause 4 and that the House will welcome Government amendment No. 2.

I agree with the Financial Secretary that we have had a good debate this afternoon. My hon. Friends the Members for Ludlow (Mr. Dunne) and for Braintree (Mr. Newmark) and my right hon. Friend the Member for Wokingham (Mr. Redwood) have highlighted some of the issues for business caused by the delays in VAT registrations and repayments. Indeed, the hon. Member for Falmouth and Camborne (Julia Goldsworthy) supported the objectives of new clause 4.

I am grateful to the Financial Secretary for clearly acknowledging the difficulties. He has referred to 95 per cent. of VAT registration cases being determined within 38 days, which is somewhat above the 21-day HMRC target. He has been clear that problems are evident, and he has recognised the difficulties for businesses and that some of the delays are “unacceptable”.

The Financial Secretary adopted a slightly different tone than has sometimes been the case for Ministers. On 24 January in evidence to the Treasury Committee, the Paymaster General did not seem to recognise the difficulties. None the less, I appreciate the tone adopted by the hon. Gentleman. He has been clear that he sees this as a temporary dip. Obviously we will watch the situation closely to see whether the steps that he outlined that HMRC is taking to address this succeed in meeting those objectives. If next year improvements have not been achieved, we will look at the matter again. However, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 8

Rural Fuel Discount Scheme

‘(1) The Treasury shall by regulations provide for the introduction, by no later than 1st May 2008, of a Rural Fuel Discount Scheme.

(2) The purpose of the Scheme is to provide a rebate on road fuel duty to qualifying persons at qualifying retail outlets.

(3) Qualifying persons under subsection (2) are persons residing in remote rural areas and qualifying retail outlets are outlets located in remote rural areas.

(4) Regulations under subsection (1) may—

(a) specify the amount of the fuel duty rebate;

(b) define “remote rural areas” in such a way that the combined total of the qualifying remote rural areas does not contain more than three per cent. of the total population of the United Kingdom;

(c) specify how the rebate is to be applied, including—

(i) how a person’s eligibility for a rebate is to be verified at the point of purchase of road fuel, and

(ii) how any administrative costs are to be defrayed;

(d) provide for it to be an offence for a person fraudulently to claim a rebate to which he is not entitled;

(e) provide for a system of registration of eligible vehicles.’.—[Danny Alexander.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

The new clause would reduce the burden of high fuel costs on residents in remote rural areas, such as those in the highlands and islands, including in parts of my constituency and those of other hon. Members. Some hon. Members here were present for a similar debate this time last year, and I welcome the opportunity to return to the subject. I recall that Labour Members chose to vote against the new clause on that occasion, and Conservative Members by and large abstained. I hope to have a little more support this time, although I note—perhaps this is an augury for the future—that the Chancellor of the Exchequer did not vote last time, so perhaps this is an issue on which he wishes to move forward when he becomes Prime Minister in a few days’ time. However, as my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) says from a sedentary position, his track record may suggest that his heart does not warm to this issue.

In bringing forward the new clause, I have tried to address some of the criticisms that were made when the matter was last debated and I have come up with a modest proposal, but one that will make a real difference and help to remedy a real disadvantage. This is a matter that I raised, in writing, with the Chancellor before the last Budget, and I am grateful for the reply that I received from the Financial Secretary, although it was not particularly positive in terms of moving the issue forward.

The right hon. Gentleman raises an important question about the definitions, to which I will come, but I should like to outline my argument first and then address his point.

The justification for the new clause is that in those remote areas where a car is most necessary, where public transport is lacking and long distances are the norm, fuel prices are far higher than they are elsewhere. As of yesterday, the average price for a litre of unleaded petrol in the UK was 96.9p. In Aviemore, in my constituency, it was 99.9p. In Stromness, in the constituency of my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael), it was 102.9p. In Lerwick, in Shetland, it was 105.4p, a difference of 10p compared with the UK average. In Dalwhinnie, in my constituency, the average price was 10l.1p. In Thurso, the average was 102.3p, showing a range of differences in the sorts of areas that might well be caught within the scope of the new clause, of between 3p and 10p a litre.

If my hon. Friend were to take a example from small islands, he would find a far greater differential. The usual price differential between the isle of Coll and Glasgow is about 30p a litre.

My hon. Friend makes an important point about the impact of high fuel prices on island communities.

Two pensioners wrote urging me to point out to the Chancellor that their car was their lifeline and that this proposal does a great deal to take into account the needs of pensioners in remote highland communities.

Not only is the price of fuel important. There is a triple whammy. There are the higher fuel prices, the fact that people in such areas travel much longer distances than in other parts of the country, and the lack of public transport. In many cases, there is either no viable public transport alternative, or a very limited public transport alternative. That all contributes to the fact that in the highlands, fuel costs are a higher proportion of domestic costs than the average across the UK—18 per cent. of disposable income is spent on fuel in the highlands, compared with a UK average of 13 per cent.

The hon. Gentleman repeatedly refers to the highlands and to Scottish constituencies. Would any English or Welsh constituencies be affected, particularly given his definition of remote rural areas? Was the 3 per cent. figure put in place to include and exclude certain constituencies, and why not 2 or 4 per cent?

The hon. Gentleman makes an important point. That figure was not put in to limit the measure to particular constituencies, but to make it clear—this was a criticism made from the Opposition Front Bench last year—that there was no particular limit on the scope of the number of people who might be entitled to this rebate. It is important to make it clear that it is not just Scottish constituencies, but areas within constituencies in England and Wales, that would benefit from this scheme. I intend to explain in more detail the definitions that I propose to use.

The 3 per cent. figure is interesting, because it solves some of the difficulties that we have had previously with the various definitions of remote, rural and sparsely populated areas. The implication of this is that it is the car owner who is liable to get the discount. Is the hon. Gentleman suggesting that it would be a car owner or a vehicle registered in a particular area, which would include the people who lived in that area? Does he intend that this will extend more widely in the remote areas that meet that 3 per cent. definition to take into consideration tourists who travel in such areas?

The hon. Gentleman makes an important point. The scheme would not apply to tourists. There is a good case for having a more generally available scheme to answer such points, but one of the major arguments against the proposal last year, which the hon. Gentleman supported, was the potential for leakage outside the target population for the measure. The reason for limiting the scope is to try to find a way to deal with the problem of leakage in an effort, I hope not a vain one, to encourage Treasury Ministers to look more favourably on trying to find a way to move this forward.

As I was saying, fuel prices are a higher proportion of costs and average incomes are lower in the highlands—they are only 85 per cent. of the UK average—and that is important in the context of social justice. I am a member of the Scottish Affairs Committee and we recently visited Bonar Bridge in the highlands, and it was made clear that one of the major barriers to work for people on low incomes was the perception that in addition to all the other calculations that would have to be made in terms of being better off in work, there was the cost of travel to work. That also applies to the long distances that many people who live in remote areas have to travel to access public services.

While my hon. Friend was visiting Bonar Bridge in my constituency, did he notice that there were no petrol stations there? The nearest one, a mile away in Ardgay, closed because it was not viable. The residents of the area now have the added burden of having to make roughly a 25-mile journey to fill up.

I did indeed notice that. I hope that the scheme that I am proposing would benefit not only the people who live in remote rural areas but the filling stations located in those areas, which provide a vital service to their communities.

The scope of the duty rebate would be limited under European law by the energy products directive. Briefings from the House of Commons Library have made it clear that the directive limits the scope of any rebate to 3.54 euro cents per litre. I use the euro cents definition for the benefit of the right hon. Member for Wokingham (Mr. Redwood) and others. At today’s exchange rate, that would equate to 2.4p per litre of unleaded petrol. The proposal would not, therefore, go the whole way towards closing the gap that I have described. Indeed, I might choose on another occasion to argue that the amount allowable for the rebate should be greater, because of the differences in prices that I have described, particularly in island communities. However, that argument should be left until the principle behind the measure that I am proposing has been established. I hope that the House will show its support for that principle by supporting new clause 8.

The scheme would be available to people who live in remote rural areas when they purchase fuel in filling stations located in those areas, thereby protecting those valuable services. There would be a need for the scheme to be administered, perhaps using a simple swipe card system. Hon. Members representing Scottish constituencies will know about the Scottish Executive’s air discount scheme, which entitles people living in island communities to discounts on their air fares as they travel back and forth from their homes. It is possible to administer schemes of this nature in a simple, cost-effective way, but administration would none the less be needed, not least to protect against the potential for fraud and leakage that Treasury Ministers were concerned about last year. For the same reason, it would be linked both to the individual and to their registered vehicle. I do not believe that there would be leakage or fraud, but having a simple registration scheme for the individual person and their vehicle would address the concerns previously expressed by Ministers.

The hon. Gentleman has referred to both the owner and the vehicle. Will he clarify to which one the rebate would apply? If it would apply to a vehicle that is registered and routinely used in a sparsely populated area, I can appreciate that. If it would apply to an individual who used a number of vehicles in such an area, perhaps for work, I would understand that too, but there needs to be clarity as to whether it is the one or the other.

The new clause is clear on that point. The discount would apply to individuals who had their main residence in such areas, but the vehicles that they wished to use while claiming the discount would also have to be registered.

The right hon. Member for Wokingham made a good point when he asked how we could protect against second home owners taking advantage of the discount. There are already schemes in place in which second homes have to be registered for certain purposes, such as the claiming of council tax discounts. Perhaps that information could be used for these purposes. Equally, it could be a requirement that the home that was registered for the purposes of the discount should be the person’s principal private residence for tax purposes. That does not wholly answer the right hon. Gentleman’s question, but it would at least partly tackle the issue that he has raised.

International comparisons also exist. France, Greece and Portugal already take advantage of the derogation available under EU law, albeit for slightly different purposes.

Knowing what a hassle it is to register for the congestion charge and to pay it on various days, I wonder what assessment the hon. Gentleman has made of the administration costs and bureaucracy that would be involved in this process, in terms not only of money but of the hassle for our constituents.

I think that this scheme would be a great deal easier to administer than the congestion charge, not least because the eligible registrants would be receiving a benefit rather than paying a cost. That would result in a great deal more enthusiasm for the registration process, which could be made very simple. I gave the example earlier of the air discount scheme, which has a very simple registration process. Adopting something along those lines would ensure that the procedure was neither complicated nor bureaucratic.

I have also, quite fairly, been asked what exactly constitutes a remote rural area. The 3 per cent. figure has been referred to, and the new clause makes it clear that such an area would be defined by regulation. However, I should like to make some suggestions on that point. There are different definitions of remote rural areas in Scotland, compared with England, Wales and Northern Ireland. I would suggest that, in Scotland, areas classified as remote small towns, very remote small towns, remote rural areas and very remote rural areas under the Scottish Executive’s urban and rural classification scheme—with which I know Members will be familiar—should be included. In England and Wales, sparse rural small towns, villages and dispersed areas—as defined by the Countryside Agency’s rural and urban area classification scheme of 2004—seem broadly similar to the Scottish definitions that I have described.

On the basis of those definitions, I estimate that 2.71 per cent. of the UK population would be entitled to claim the proposed discount. I do not have an estimate of the number of filling stations in those areas; that information is not available. The 3 per cent. limit would allow for some variability in the definitions if, for example, it became necessary to ensure that there was absolute consistency between the arrangements in Scotland, England, Wales and Northern Ireland. Those definitions are clearly understood by the agencies that promulgated them, and they are already used by the Government for other purposes.

My assumptions on costs may be challenged but, working on the basis of a discount of 2.4p or 3.54 euro cents for that percentage of the population, if everyone spent all the money that they spend on fuel in rural filling stations and consumed fuel on an equal basis, I estimate that the cost would be about £32 million.

The hon. Gentleman has just mentioned people spending money in rural filling stations. The new clause states:

“The purpose of the Scheme is to provide a rebate on road fuel duty to qualifying persons at qualifying retail outlets.”

Is it not possible that someone might qualify but choose to buy their petrol in an area that is not considered remote, because that was a sensible thing to do? How would the scheme work in those circumstances?

The hon. Gentleman makes an important point. The purpose of the scheme is to level the playing field. In my constituency, for example, the city of Inverness would not qualify for the discount under the scheme because petrol prices there are pretty near to the UK average. We are not seeking to implement the scheme in such a way that it would lead to a cut in prices there. Similarly, if the hon. Gentleman drove to London and bought petrol here, that would not qualify. In the case of Inverness, I shall concentrate on persuading Tesco to cut the price of its fuel to the same level that it charges at its store in Elgin, where it has competition from Asda. It has no such competition in Inverness. That would ensure an additional benefit.

The scheme would bring significant benefits to rural areas and address an obvious injustice. In the longer term, a scheme involving road user pricing would bring the combination of benefits and environmental advantages to remote rural areas that the Liberal Democrats are seeking to achieve. In the meantime, however, given that a car is a necessity in those areas, and the amount of car use will not be reduced or increased, it would be wrong to reject the new clause on an environmental basis. We have other ways to promote the use of fuel-efficient vehicles, for example through vehicle excise duty incentives. The scheme is designed to reduce the additional cost burden on people living in the communities that I have described, and I commend it to the House.

I want to pay two compliments to the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander). First, he undoubtedly spoke from the heart on behalf of his constituents. Secondly, in putting the proposal together, his party has made some attempt to listen to some of the criticisms that were ventilated in relation to last year’s proposals, which he mentioned, and to which I will return in a moment.

As was apparent, the new clause is the Liberals’ latest attempt to find a workable solution to some of the problems that undoubtedly afflict people living in remote rural areas and rural areas generally. As I said in Committee, it is incontestably true that people living in remote rural areas often do not have access to public transport in the way that people in less remote areas do, nor do their circumstances make walking, or even cycling, practical.

The 2003 national travel survey for England—the hon. Gentleman did not make clear how many people in England and Wales would be covered by the proposal, but we will return to that in a moment—showed that half the residents in rural settlements of fewer than 3,000 people lived within a 30-minute walk of a bus stop. According to the expenditure and food survey for 2002-03, households in such areas spent £70.60 on transport, compared with households in rural areas, which spent £45.50 on transport. Of course, there is less congestion in some areas, which can lead to apparently counter-intuitive results—a bus in a remote area may be less environmentally friendly than a car if that bus carries only a few people. In short, people in such areas often need cars, and the hon. Gentleman’s remarks about fuel prices in those areas were entirely apposite.

To reinforce the hon. Gentleman’s bus analysis, not only is a bus with few passengers less environmentally friendly than a car, but a car, because it is used only when a journey is necessary, makes less impact on the environment.

I am sure that the hon. Gentleman is correct, and I think that he made that point in the same debate last year.

Last year, the hon. Member for Inverness, Nairn, Badenoch and Strathspey attempted to alleviate such problems by proposing lower rates of fuel duty in remote areas. The Liberals also tabled an amendment to raise band G vehicle excise duty rates in general, but in some areas to cut all bands, for what were then old cars—including band G cars, which are the most polluting—and in other areas to cut all bands except band G, for what were then new cars. As Members who were present for last year’s debate will recall, those amendments did not stand up to examination in every detail. In effect, that was acknowledged by the hon. Gentleman when he proposed the new scheme. It is perhaps significant that the Liberals have not retabled the VED cut proposal at all this year; they did retable the lower fuel duty rate proposal, but in Committee, not on Report. It was significant that the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said in Committee that she was doing that “to highlight a principle”, which suggested to me that she did not have any great confidence in its practicality.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey has proposed, essentially, a coupon scheme, but he described it as a kind of swipe-card scheme. Under the scheme, people who live in remote rural areas and drive eligible vehicles would be entitled to cash in their coupons or swipe their cards at qualified retail outlets for a rebate. That raises several questions.

To return to last year’s debate: is there an accepted definition of a remote rural area? The hon. Member for Dundee, East (Stewart Hosie) famously pointed out last year—in Committee, I think—that there are several definitions. Certainly, were the proposal to be progressed, the 3 per cent. figure would have to be considered closely. Once that problem is settled—I shall assume that it is capable of being settled—there is the question of who should qualify, which the new clause as drafted does not make clear. Is it right, for example, that a multimillionaire with a second home in a remote rural area should be able to get a discount, whereas a widow dependent on benefits in an urban area should not? Once that is settled, there is the question of what vehicles should qualify. If band G vehicles, for example, are not to qualify—on paper, there is a case for them not qualifying—will our multimillionaire driving a band F vehicle get a discount, while, say, a farmer on a lower income driving a band G vehicle does not?

The hon. Gentleman makes an interesting point. However, in answer to the right hon. Member for Wokingham (Mr. Redwood), who is no longer in his place, I suggested that a requirement that the remote rural area be the individual’s primary residence for tax purposes would, except in the case of the small number of multimillionaires who live permanently in such areas, deal with that.

The hon. Gentleman did make that point, but that is not in the proposal that is before us to vote on. He proposes giving the Minister power to define such matters in regulations; I shall return to that point later.

There are further questions. What are the qualifying criteria for retail outlets? How is the identity of the person claiming the rebate to be verified? Should the proposal be met by a commensurate tax rise elsewhere? The debates have already established pretty clearly that the use of the derogation in France has raised fuel rates in some areas, in order to pass on the reduction to others. The hon. Gentleman and his party would have to answer that question. In Committee, the Liberals simply said that they would favour a tax cut. I am simply saying that that is not how the derogation appears to be working in France at present.

The hon. Gentleman is right: in France, the derogation is leading to an increase in regional rates. Principally, that is to help defray the costs of responsibilities that used to be carried out by central Government and are now carried out at the regional level, and it is time-limited to three years.

I am grateful to the Financial Secretary for that information.

I am not saying that all these questions are incapable of resolution; plainly they are, or at least might be, capable of resolution. None the less, the terms of the new clause, on which the House will presumably be asked to vote, are, like last year’s proposals, not a workable solution. I want to explain why.

I am listening carefully to the hon. Gentleman’s detailed arguments as to why my hon. Friend’s proposal does not work. He has acknowledged that those of us in rural areas, where fuel prices are higher and there is no access to public transport, have a problem. What is his solution to that problem?

I am tempted to reply that when we get a workable solution, rather than three unworkable proposals, we will respond with our own; my answer, however, is that I will come to that precise point in a moment, and explain why we might have been able to support the new clause had it been formed in a slightly different way.

A Bill is amendable, but regulations are not. Under the new clause, before the next Finance Bill completes its passage—we must presume that it will not have done so by 1 May—Ministers would introduce the scheme by unamendable regulation. That cannot possibly be right. Were it right to propose such a scheme, surely Members would want to be able to amend the proposal. However, we have not had any proposal that is capable of being amended, only a vague outline proposal.

We would have been pretty sceptical had the Liberals tabled an amendment calling for a report on the swipe-card scheme, but we would have said that the Treasury should publish an assessment. I am not sure why the hon. Member for Inverness, Nairn, Badenoch and Strathspey did not table an amendment calling for a report, because plenty of amendments do. Perhaps he felt that there were already a lot of those. Whatever his reason, he has essentially proposed an outline scheme, which the Minister would be required to rush through before the next Finance Bill is complete and which the House could not amend. On that basis, no one should support it in the Lobby.

Order. I am looking for the hon. Member for Falmouth and Camborne (Julia Goldsworthy) among a forest of her colleagues. I think that I should give the Liberal Front-Bench spokesman the opportunity to speak first.

The hon. Member for Wycombe (Mr. Goodman) finished slightly more abruptly than I expected him to, Mr. Deputy Speaker.

I welcome the opportunity to discuss the proposal further, not least because it has been interesting to have a little more light cast on the absence of any constructive proposals from the Conservatives. The hon. Gentleman said that the problem could have been resolved had the new clause been phrased slightly differently, but we see no alternative.

In so far as is practicable, can the hon. Lady explain why her vehicle excise duty proposal, about which her hon. Friends spoke so passionately last year, has not been retabled?

I am sure that you would call me out of order, Mr. Deputy Speaker, if I suddenly disappeared down a side alley to discuss the vehicle excise duty when we are talking about a fuel duty rebate. It might be worth pointing out in passing, however, that proposals similar to those made by the Liberal Democrats have been accepted to increase vehicle excise duty. The principles, therefore, have been adopted.

If those on the Conservative Front Bench accept that there is a problem but choose not to propose a solution, surely the only conclusion we can draw is that they simply do not care.

I am afraid that my hon. Friend has drawn a rather depressing, although wholly accurate, conclusion.

In the Committee of the whole House, the hon. Member for Wolverhampton, South-West (Rob Marris) commented on the need to have carrots and sticks for environmental measures to try to change behaviour. We discussed those issues, including this one, at great length. I am pleased that my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) has developed the argument further since we had the opportunity to raise it in Committee a few weeks ago.

In terms of the carrot and the stick, my hon. Friend was trying to make the point that in areas of his constituency—and, for that matter, in areas in my neighbouring constituencies, although I suspect not in mine because it is urban—where there is no alternative to the car, the increase in fuel duty proposed by the Chancellor in the Budget, a measure that the Liberal Democrats welcomed, will not have an impact on people’s behaviour because it is impossible for them to change it, as there is no alternative. On that basis, it is sensible for the Government to consider seriously the idea of taking up the derogation from article 19 of the EU energy products directive, as other countries have done, and recognising the difficulties that people in rural areas face.

As my hon. Friend said, those people are facing a triple whammy. They have lower wages than average and no access to public transport, and they pay higher fuel prices at the pump. His solution is not that they should have cheaper fuel, but that they should pay a price comparable with that paid by others. It is important not to underestimate the effect that that triple whammy has not just on those individuals, but on the local economy. If people have to drive elsewhere to get fuel for their car, the chances are that they will spend their money in other places as well. It will undermine their local community and leave people who do not have access to a car with less access to other resources, because—

Order. I am sorry to interrupt the hon. Lady, but her voice fades away if she turns to her colleagues and does not address the Chair. That is most distressing for those who are trying to report our debate.

I am sorry, Mr. Deputy Speaker.

We have a practical remedy. One reason why we have the differential in fuel prices is market failure. Prices are higher not just because the cost of transporting the fuel is higher, but because there is no competition. It has been argued that the proposal could be abused, but if people have to drive a 25-mile round trip simply to get to their nearest petrol pump, the idea of their doing a 100-mile round trip to get 1p off a litre of fuel is highly unlikely.

We would have welcomed amendments from the Conservatives.

Can the hon. Lady indicate whether she thinks that if the price of fuel went down in rural areas as a result of the new clause, fuel usage would be likely to remain the same or go up, first by existing residents of remote rural areas, and secondly in terms of encouraging commuting by people who currently do not live in those areas but who would go there to get cheaper fuel, and therefore commute longer distances? She talks about local shopping. If fuel becomes cheaper for people in remote rural areas, it strikes me, as someone who represents people who live in an urban constituency, that lower fuel prices would make them more likely to drive a distance for their shopping than to support the local shopping facilities that she and I wish to see.

Had the hon. Gentleman been in the Chamber when my hon. Friend laid out his argument, perhaps he would have understood that such individuals would not qualify for the scheme set out in the new clause.

Some hon. Members who represent urban areas should get out into the country more and see what life is like there. There is not a local shop to go to, because it is closed. There will not be a local garage to go to either, unless we have this proposal or something similar.

My hon. Friend’s comments are self-explanatory.

Listening to the debate, and thinking about the impact that higher fuel prices are having in many rural constituencies, draws my mind back to comments made by the current Chancellor—the Prime Minister of the very near future—on the need for child poverty to be recognised and for action to be taken across Departments to tackle it. Fuel poverty is recognised more widely, and the Government have acted to address that problem. We have raised the specific example of people on low incomes who spend a relatively high proportion of their income on fuel to get around, and to get to their jobs. I am interested to hear how the Treasury thinks that not having proposals to tackle that problem is having an impact on fuel poverty. When the new Prime Minister is in his place, perhaps the Government will need to think again about taking action if they are to hit their poverty targets.

I have some sympathy with the new clause, not least because I tabled similar amendments in the past few years, in particular in what was new clause 6 on the Floor of the House on 28 June last year. Proposed new subsection (1AB)(b) of that new clause provided for

“specific fuel duty reductions targeted at fuel sold in sparsely populated areas”.

I hope that the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) recognises that, as the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) did not in last year’s debate.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey has at least sought to answer some of the legitimate questions posed about similar amendments over the past few years. He has, however, left other questions unanswered, and I shall touch on those in turn. Subsection (2) of new clause 8 says:

“The purpose of the Scheme is to provide a rebate on road fuel duty to qualifying persons at qualifying retail outlets.”

At that point, the hon. Gentleman should have mentioned qualifying vehicles.

The hon. Gentleman has tried to use regulations to define remote rural areas. In a sensible attempt to bypass the definitions already in place—which, off the top of my head, I think may cover 95 per cent. of the land mass or 30 per cent. of the people—he has limited the definition to the land mass that contains no more than 3 per cent. of the population. It may be arbitrary and need to be defined a little more, but that approach is sensible.

The hon. Gentleman said that regulations would provide for a system of eligible vehicles. A great deal more work is required to be done on that, especially if we are not simply taking account of the cost of living issues in remote rural and sparsely populated areas, but considering economic development in those areas as well, particularly in relation to a very short seasonal tourist trade. I am not making a special pitch for that tonight, but work should be done on that issue in conjunction with the rest of this area.

The hon. Gentleman did not define the primary residence qualification, which would have been useful in defining who and what was eligible, but work could be done on that. He did say that the regulation would look at how administrative costs would be defrayed. The difficulty is that that would cover only the administrative costs of a system that might be cumbersome and slightly bureaucratic—although it would not necessarily be so. There is no attempt to specify how the real cost of the reduction might be funded, as we did previously with the VAT offset.

Having said all that, I would not normally support an amendment with so many weaknesses, but the hon. Gentleman said that he would seek a derogation and he hoped that the principle of what he was proposing—that the high costs faced by those living in sparsely populated areas should be defrayed—would be accepted. With that heavy caveat on the record, we would be prepared to support the new clause, should he push it to a vote.

More importantly, the hon. Member for Wycombe (Mr. Goodman) said that he believed that some of the issues were resolvable. In previous debates, the Financial Secretary has expressed some sympathy for people who live in remote and rural areas and suffer from what are, in some cases, 10, 15 and 20 per cent. increases in the cost of a litre of fuel compared with the average price in the nearest modest county town or city. With the good will that exists, and the persistence shown by many hon. Members on this issue, I hope that a solution to the problem might be found for a subsequent Budget or Finance Bill. I look forward to hearing what the Financial Secretary has to say on this .

I rise to support my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) and to congratulate him on having taken on board the criticisms that have been made in the past and coming up with a workable and sensible scheme. If I had a criticism of it, it would be that it shows too much restraint and not enough generosity, but I would rather have some crumbs than none at all, so I am happy to support him. If there is an element of “Groundhog Day” about this debate, I make no apology for entering the fray again. As a great Scottish king once said, if at first you do not succeed, try, try and try again. My hon. Friend is certainly doing his best.

The issue is simple. As I drove down the A9 this morning, in Brora, petrol was 102.9p a litre, so it is at a premium compared with the figures that my hon. Friend gave for Inverness, Edinburgh and London. That is a regular occurrence. Over the years that I have spoken about this issue, I have looked at the premium on many occasions and it ranges from a minimum of 6p up to a maximum in my constituency of 12p. The reason is straightforward—it has been investigated repeatedly by the relevant competition authorities—and it is because there are too few vehicles crossing the forecourt to provide sufficient cash income to cover the fixed costs of running that forecourt. Therefore, the extra price is necessary. My hon. Friend spoke of the triple whammy, and I will not labour that point, but I will point out some of the facts about the location of petrol stations.

If one is at the western end of the north coast at Durness and one drives for an hour or so to Tongue, which is about halfway across, there are no petrol stations in between. It is some 50 miles, but much of the road is single track and it is mostly empty and straight, so one drives at an average 50 to 55 mph. Between Tongue and Thurso there are two petrol stations, one in Caithness, near Thurso, and one that is about halfway. If one goes south from Durness to Kinlochbervie, which is the best part of two hours to drive, there is one filling station on the main road at Scourie. The residents of those areas therefore have to drive up to 20 miles and back just to fill up. Part of the problem is that rural filling stations have closed because they have been unable to keep going for the commercial reasons that I have mentioned.

We all accept that in the 21st century transport in such areas is not a luxury but a necessity. If one wishes to access a hospital from the north of Sutherland, one has a 200-mile plus round trip, with no public transport that can get one there. The NHS Highlands is good about providing taxis for those who cannot access private cars, but the vast bulk of people have to use a private car. Many services that people throughout the country take for granted as readily accessible are, as a matter of course in the far north, a 20, 30, 40 or 50 mile journey.

My hon. Friend’s scheme of a 2.4p rebate, based on the tight criteria he has drawn and using the experience of the Scottish Executive’s air discount scheme, which applies to Caithness and most of Sutherland as well as the islands, is a good one. He has given the figures for the cost to the Exchequer, but he has worked them out on the basis that 100 per cent. of those eligible will take up the scheme. As we know from questions asked in the Treasury Committee, the take-up rates of almost every benefit offered are 50 per cent. or lower. It is therefore highly unlikely that that cost would be the effective cost. I have one small suggestion that might help, which is to devolve the issue to the Scottish Government and let them pay for it out of the block grant. That would remove the cost from the Treasury entirely and please the hon. Member for Dundee, East (Stewart Hosie).

The burden carried by my constituents is very real and I have sought to bring it before the House on several occasions, as have my hon. Friends who represent similar constituencies. It is a genuinely practical scheme, which would allow Ministers to put something in place that would alleviate that burden without giving any advantage. I was heartened to hear the hon. Member for Wycombe (Mr. Goodman), speaking for the Unionists, talk about his agreement with the principle, which is a great step forward from last year. I only hope that the occupants of the Treasury Bench will have undergone a Damascene conversion from their somewhat uncaring attitude and that we may look forward to some encouragement at least from the Financial Secretary.

We all know that fuel that is sold in remote areas is sold at a much higher price than in urban areas. The purpose of new clause 8 is to achieve a level playing field to work against the triple whammy of higher fuel prices, no public transport alternatives and the need to drive longer distances. I shall give some examples from my constituency that will show how large the differentials can be. On the large islands of Mull and Islay, a litre of unleaded is usually some 15p to 20p more than in Glasgow. On the smaller islands, the differential is much greater. On Coll and Colonsay, it is usually some 30p a litre extra.

The additional cost works its way through the whole economy. We all know that the price of fuel adds to the price of all other goods. High fuel prices make it more difficult to run and sustain a business in those remote areas. The remote communities in the highlands and islands have suffered years of population decline, which unfortunately shows no sign of stopping. High fuel prices are clearly part of the problem, as they discourage people from starting up the businesses that would create the jobs that would allow young people to stay.

The environmental justification for high fuel taxes is that they can be used to encourage people to change behaviour, but that does not apply in remote rural areas with no public transport alternative. It would make no sense for councils in such areas to subsidise bus services, because most of the time the buses would run empty, or with only one or two passengers. There is no alternative to car travel in such areas, and no environmental argument in favour of higher fuel taxes there.

Cutting the price of fuel by a few pence a litre would not encourage more people to drive more. People do not drive dozens of miles along twisting, single-track roads just because they enjoy it; they make such journeys because they have to. The car is not a luxury; it is an essential.

I think that I understand what the hon. Gentleman is saying about car usage. I realise that the elasticity of demand for fuel is not great in remote areas, but one would normally expect usage to increase if the price went down. However, if he is saying that that is not the case, is he also saying, conversely, that it is not Liberal Democrat policy to raise car fuel duty across the board, in line with the party’s green tax commitment, to discourage usage? The hon. Gentleman does not think that a higher price would do that, just as he does not think that a lower price would encourage usage.

In the vast bulk of the country, putting up the price of fuel would encourage people to use more environmentally friendly alternatives, but that argument does not apply in remote rural areas where there is no alternative.

I have explored this very question with one of the local filling station owners in a village near my own in Orkney. He has told me that when the price of petrol falls, as it does from time to time in response to reductions in the wholesale price, he sees absolutely no change in demand. Does my hon. Friend agree that we may be able to use that evidence to offer some reassurance to the hon. Member for Wolverhampton, South-West (Rob Marris)?

I thank my hon. Friend. His intervention is very helpful to the argument and demonstrates the point that I am making.

New clause 8 would help reduce the burden on people living in remote rural areas. It restricts the definition of such areas so that the combined total of qualifying areas would not cover more than 3 per cent. of the UK’s total population. Therefore, its cost to the Treasury would be very small. The maximum differentiation of duties allowed under the EU energy products directive is 3.54 eurocents per litre for unleaded petrol. At current exchange rates, that amounts to 2.4p a litre, or roughly 5 per cent. of the duty. For diesel fuel, the maximum differentiation is 2.3 eurocents, or 1.56p.

I would like the Government to negotiate in Europe for a higher differential, but 2.4p is the maximum currently allowed. As my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) explained, reducing fuel duty by that amount for dwellers in remote rural areas would cost the Treasury about £32 million a year. I think that the Treasury can well afford that sum, and the new clause would mean that extra money would be available for people in remote rural areas. If it were spent in those areas, it would go a long way towards regenerating the rural economy.

I and my hon. Friends raise this matter every year, because it is a severe problem in our constituencies. The members of the Conservative Front-Bench team have accepted that a problem exists, but they do not appear to have a solution. I hope that the Government will accept today that there is a problem and, even if they feel that they cannot accept this new clause, come up with a solution of their own. In terms of fairness and social justice, such a solution would be of great benefit to rural areas.

It is the Report stage of the Finance Bill, so it comes as no surprise to hear the Liberals plead for special tax breaks for motorists in rural areas—and especially in Scottish rural areas. We on this side of the House have quite enjoyed the bickering between the two main Opposition parties, as we have the fact that the consensus between the Scottish nationalists and the Liberals about this new clause shows that coalition politics is clearly breaking out.

In all honesty, should not the Financial Secretary thank the Liberals for proposing that he have the power to bring forward, within a year, regulations that they would not be able to amend?

I do not know about thanking the Liberals, but I should thank the hon. Gentleman for his detailed demolition of some of the most obvious practicability problems, as he called them, with the new clause.

I express again the sympathy that I have expressed before for some of the problems caused by higher pump prices in rural areas than elsewhere in the country. However, they are high not because of tax rates but because of high distribution costs and the typically low-volume throughput of rural petrol stations. The problem is not one of market failure, as the hon. Member for Falmouth and Camborne (Julia Goldsworthy) contended, but of low market demand. That is at the root of the problem, and I have not heard a strong enough case to justify using tax to interfere with, and in some way direct, the commercial process of price setting.

Other, more environmentally friendly ways exist to help people facing additional costs. We have debated on other occasions the Scottish Executive’s rural transport fund, which has helped more than 150 rural community transport schemes since 1998. Moreover, the Commission for Rural Communities has found that Government policies on transport in rural areas have made a significant difference in the fight against disadvantage there.

There are problems with how to define “rural” or “remote rural” areas, with whether eligibility should depend on the registration of the vehicle or on the driver’s residency, and with the fact that the cost of fuel is part of the overall cost of living. In fact, housing is more expensive in many urban areas than it is in most rural areas but, leaving all that aside, we must be really clear about what the new clause would not achieve.

The new clause would not guarantee any reduction in the prices that people pay for their petrol or diesel at the pumps. That is because it would be impossible to guarantee that a fuel supplier who would benefit from any duty reduction under the proposed arrangements would pass it on to his customers—especially in areas with little competition, such as those that the Liberal Democrats are concerned about.

I am intrigued by the way that the Financial Secretary compared the cost of fuel in rural areas with the cost of housing in urban areas. Is there a hint, underlying that thesis, that the Chancellor of the Exchequer, who represents Kirkcaldy and Cowdenbeath, was wrong yesterday to suggest that there should be an increase in the availability of social housing in urban areas?

No, my right hon. Friend was absolutely right to do so. A renewed Labour Government will deal with the real concerns about the availability and affordability of housing, but my point was that the cost of fuel is part of the overall cost of living. Prices for some of the commodities that people need and use happen to be lower in rural areas than they are in urban areas.

In some areas of my constituency and the neighbouring constituency average house prices are 30 times average income, so the hon. Gentleman may be wrong to say that rural areas have lower housing costs.

I shall move on.

It is important to be clear about what would not be guaranteed under the proposals and about their practical impact. Trying to implement such proposals would involve complex and expensive changes to the tax system. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) knows that the duty point for hydrocarbon oils is either when the oil is imported into the UK or when it leaves a refinery. At present there is no mechanism—as would be required under his proposals—to account for duty where the fuel is used. Moving the point at which the duty becomes payable down the consumer chain would mean that instead of hundreds of companies being liable to pay fuel duty, thousands would have to pay it. Such an exercise would self-evidently be complex, expensive and burdensome.

This is the Report stage of the Finance Bill, so this is the Liberal proposal to benefit motorists, but I am afraid that this is me from the Treasury Bench saying that the case has not been made in principle or in practice. If the hon. Gentleman wants to push the new clause to a vote, I urge my hon. Friends to resist it.

I am grateful for the contributions that have been made in the debate. We have heard some positive remarks from the Liberal Democrat Benches and a grudgingly positive remark from the hon. Member for Dundee, East (Stewart Hosie).

The hon. Gentleman referred to the costs of the proposal. My estimate of £32 million is not a spending commitment, because we would seek to ensure that those funds were provided through the rest of the fuel duty system, which would result in only a minuscule change overall in a system that currently yields £23 billion. Only a tiny adjustment would be necessary to make the rebate financially possible.

The contribution of the hon. Member for Wycombe (Mr. Goodman) was astonishing. He expressed sympathy for the plight of rural people, but did not propose to lift a finger to do anything about it.

Does my hon. Friend agree that the true magnificence of the Conservatives’ position becomes apparent when one considers their view about a national road user pricing scheme, which in the long term is the obvious way to reduce the costs of motoring in remote and rural areas? The Conservatives are not even promising us jam tomorrow.

Will the hon. Gentleman state for the record that he would be happy for the Financial Secretary to come to the House next year with a scheme whose regulations the hon. Gentleman and his colleagues will not have an opportunity to amend?

The hon. Gentleman hangs his argument on that constitutional point, but on several occasions, in relation to different measures, he has proposed amendments allowing regulations, to which the same point would apply. It is a characteristic of legislation that primary legislation makes things clear at one level, while regulations do so at another, which is entirely appropriate in this case and would be a pathetic reason not to vote for this important new clause. The Conservatives’ position is characteristic of their approach to the highlands and islands over the years.

The Minister referred to the impact of the new clause on the market. It has been demonstrated, not least by the comments of my hon. Friends, that the market operates quite differently in the areas we have been talking about. The provision will not obstruct the more general operation of the fuel market across the country; it will deliver a small but important and significant rebate to hard-pressed communities.

The Minister misunderstood the proposal in one respect. He said that there was no way to ensure that the benefit was actually passed on. However, ensuring that the discount was available only to qualifying persons at qualifying filling stations would mean that on presenting their swipe card the eligible person would receive a discount on the advertised price at the filling station, which would undoubtedly be selling petrol to other individuals at that advertised price. There would clearly be a difference, from which the qualifying person would gain. The Minister may have misunderstood that important point.

I was sorry to hear that the Minister could not understand how the proposal could be made to work, especially as our proposal is a great deal simpler than the extensive administration of the tax credit system over which his Department presides—although I would not use that as an example. The scheme is simple and modest, and would deliver real benefits to the people of remote rural areas. For that reason I shall press the new clause to a Division.

Question put, That the clause be read a Second time:—

New Clause 11

Private equity

‘It shall be the duty of the Treasury to prepare and lay before the House of Commons a report setting out the annual and cumulative cost to the Exchequer of—

(a) implementing the Memorandum of Understanding between the British Venture Capital Association and the Inland Revenue dated 25th July 2003 on the tax treatment of carried interest; and

(b) the deductibility of interest payable on loans for the purposes of calculating corporation tax liability.’.—[Mr. Hoban.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

Judging from the number of Members present, this is going to be quite a short debate, but I hope that it will achieve something. I hope that we will move the debate on so that we are all able to take a view about private equity based on the facts, rather than supposition.

By way of background to the debate, it is worth highlighting some of the benefits of private equity to the economy as a whole. Companies backed by private equity firms have increased their work force by an average of 9 per cent. each year for the past five years, whereas FTSE 100 companies increased their work force by an average of only 1 per cent. a year over the same period. Companies backed by private equity firms have increased their sales by 9 per cent. per year—almost double the average for FTSE mid-cap companies. The private equity industry has invested more than £60 billion in 24,000 UK companies over the course of the past 20 years. So, the record is impressive. The value that is created is one of the reasons why many pension funds choose to invest in private equity funds. The returns that they offer help millions of people across the country to receive a decent income in retirement.

It is important that we put the current debate in that context. Over the course of the past few months that debate has been in two stages. In the earlier part of the year, there were concerns about the transparency of private equity—

Order. I remind the hon. Gentleman that this cannot be a general debate about private equity, despite the debates that have taken place here and elsewhere.

Indeed, Madam Deputy Speaker. I thought that it was important, for the sake of those taking an interest in the debate, to set the context in terms of some of the remarks that have been made in recent weeks. Against that clear background, there have been a number of calls from different sources for reviews of private equity and the way in which some of the tax structures work.

Let me quote one example. I hope that the new Prime Minister—as of Wednesday afternoon—has read the remarks about private equity made by the new deputy leader of the Labour party, the right hon. and learned Member for Camberwell and Peckham (Ms Harman). I am sure that she is looking forward to working closely with him. She said—

Order. I have already ruled that this is not a general debate about private equity. The hon. Gentleman’s remarks must be related to the new clause.

Indeed, Madam Deputy Speaker. The right hon. and learned Member for Camberwell and Peckham called for action on taxation, which is the point that I am coming to. Several people have called for action on taxation over the past few weeks. Indeed, members of the Treasury Committee have made that a feature of their inquiry on private equity.

New clause 11 would give the Treasury the opportunity to produce information to help to bring clarity to the debate on private equity. It is important to know the Treasury’s estimate of the cost of the tax relief granted to private equity companies and venture capital funds through the application of taper relief on carried interest. The matter is not straightforward, which is why we have asked the European School of Management to examine carefully not only the broad question of private equity, but some of the tax issues. We realise that taper relief is an incentive for people to make long-term investment decisions and to be rewarded for the risk that they have taken.

The treatment of carried interest stems from a memorandum of understanding between the British Private Equity and Venture Capital Association and the Government. The MOU is referred to in the first part of the new clause. That treatment is applied to the carried interest, which is described in the MOU as

“an interest in a partnership which provides that the holder is entitled to participate in the super profit made by the fund”.

Super-profit occurs when the return from a fund exceeds various thresholds. In effect, the MOU disapplies income tax rules under the Income Tax (Earnings and Pensions) Act 2003 that usually apply to securities that are acquired as part of employment.

We have a problem understanding the amounts involved. For example, during last week’s Prime Minister’s questions, the right hon. and learned Member for North-East Fife (Sir Menzies Campbell) said

“we are giving a tax break of £6 billion per annum to some of the wealthiest people in the United Kingdom.”—[Official Report, 20 June 2007; Vol. 461, c. 1372.]

I was not quite sure what he meant by that. While the Red Book gives that figure as the value of taper relief, that relief applies to a wide range of transactions and people. Last week, the managing director of Gala Bingo highlighted the fact that all his employees who invest in shares in the business benefit from that taper relief. As part of the debate on private equity, it is important that we get information about the value of tax relief, which would be the purpose of the first part of new clause 11.

I would be keen for the Treasury to publish how much it has raised through private equity in capital gains tax in each year since 1997 and the impact that the MOU has had on the amount taken. Given that the Treasury is conducting a review on carried interest, I assume that it has such information at its fingertips. It would be beneficial to the entire debate on private equity if that information was published so that people could gain an understanding of the true extent of the problem. It would also be helpful if there was a way of analysing from the Government’s figures the time that the carried interest had been held to determine whether private equity investors hold for the long term. At the moment, the taper relief kicks in after two years. The period for which private equity holders are holding carried interest beyond that cut-off point is a matter of contention. Will the Economic Secretary share with us the terms of reference of the Treasury’s review of the matter?

The other aspect of tax relief that has recently caused concern, which has been cited by the Transport and General Workers Union in the context of the acquisition of Boots by Kohlberg Kravis Roberts, is the fact that interest paid on money used to fund an acquisition is subject to tax relief, as is any money borrowed by companies. It is important that we know the extent to which private equity is using a relief that is available to all businesses that are owed money. Such information would bring clarity to the debate that is taking place not only in the House, but elsewhere. While the Red Book tells us the value of the taper relief, it does not give information about the general tax relief or the extent to which the private equity industry takes advantage of that. However, earlier this year, the Economic Secretary announced a Treasury review on the interest treatment of certain loans, so perhaps he will be able to share information with the House to inform the broader debate on that tax relief.

As you indicated, Madam Deputy Speaker, this is a narrow debate. However, it is important that we have such information so that the wider debate, which has been characterised by generating more heat than light, can take place in the context of that information.

I support new clause 12, which seems helpful. It cannot be wrong to request information about a matter that is a little obscure and not especially transparent. I thus welcome the search for entitlement.

The measure is brave, in a Sir Humphrey way, given that the Conservative shadow Chancellor gave a pretty robust defence of the tax privileges of private equity firms at their annual dinner. Some Conservative Members really know about the business. The hon. Member for Hammersmith and Fulham (Mr. Hands) wrote a toughly worded letter to the Financial Times last week in which he defended the status quo. I do not know whether the purpose of the new clause is to row back from that. However, as I understand it, the starting point of the Conservative party is that it wishes to defend the existing regime.

On the other hand, there is some consensus that things are happening that need to be looked at again. I certainly interpreted the Economic Secretary’s comments, when he spoke at the London School of Economics at the beginning at March, as showing a willingness to consider at least the second issue raised in the new clause—interest relief. I am sure that the Economic Secretary will not mind me quoting what he said—in fact, I am sure that he will say it again:

“Today, I can announce that the Government will review the current rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals”.

That is half of the problem that is described in the new clause, and I am sure that we would all agree about that. The meat of the problem, and the area that I think that we are debating, is the bit of the tax-privileged status of private equity that relates to taper relief.

Of course, as the hon. Member for Fareham (Mr. Hoban) acknowledged, those concerned with private equity are merely one group of people who currently benefit from that relief, and I am inclined to ask, “Why pick on them?” After all, there are other groups who benefit from the relief in a similar way, and no more or less reputably. I read in the Evening Standard today that Madonna has just bought her sixth £1 million-plus house. I do not know what her tax status is; if she is a British taxpayer, she will presumably be able to benefit from taper relief, if she holds that property as an investment for a period of years. It is not just those with private equity who benefit from taper relief.

To understand the nature of the problem that the hon. Member for Fareham raised, we need to go back to Parliament’s decision, in 1998, to introduce such an approach to capital gains tax. I think that I have the advantage of being the only person in the Chamber who took part in that debate; it was opened by the hon. Member for Coventry, North-West (Mr. Robinson), and the reply was given by the Conservative spokesman, the then Member for Arundel and South Downs, who left the House in unfortunate circumstances, and the right hon. Member for Wells (Mr. Heathcoat-Amory). As I remember it, I said pretty much the same as the Conservatives at the time, which was that we had a good system of capital gains tax, which was introduced by the noble Lord Lawson. It was simple and clear, and it applied the same rate for capital gains tax and for income tax. It was straightforward, so why introduce complicated taper provisions that could eventually be taken advantage of by the group that we are discussing and others?

Several arguments were advanced. The first was that if we create a differential, and if there is a 40 per cent. rate on one hand and a 10 per cent. rate on the other—that is roughly the magnitude of the difference between income tax and capital gains tax—of course people will look for ways of exploiting that, and that is exactly what the British Private Equity and Venture Capital Association sought to do in its memorandum. If it had not done it, other groups would have done it in a different way. Moreover, the Conservatives and my party argued that there was no justification for the suggestion that the measure would change business behaviour. Indeed, what was forecast by the Opposition parties is exactly what has happened. Groups of people have taken advantage of that very generous provision, which, as the hon. Member for Fareham says, has cost more than £6 billion, and there is not a great deal of evidence that it has changed business behaviour in any way that has contributed to national economic welfare.

It is absolutely right that we look afresh at the relief, not simply in relation to private equity, but in relation to the whole, large-scale, far-reaching and extremely generous tax concession. In my view, we should go back to the regime that applied in 1997, which was perfectly satisfactory. That is the basis on which we have argued for getting rid of the whole taper relief arrangement, rather than simply singling out the part of it that applies to private equity. I suspect that I would go a great deal further in reforming the system than the Conservative Front-Benchers would, but none the less, their new clause, which I understand to be probing and a pursuit of information, seems entirely sensible and worth supporting.

I am happy to respond to the debate on the new clause, and on proposals for a report to Parliament on the costs to the taxpayer of the tax treatment of carried interest and the deductibility of interest payable on loans. I am happy to respond in the spirit in which the hon. Member for Fareham (Mr. Hoban) spoke to his new clause. I think that he was seeking to probe our thinking on some tax issues in advance of the pre-Budget report, while trying to avoid being drawn into too wide a discussion on the merits or otherwise of private equity, and the views of deputy leadership candidates—or victors—on the subject. I am happy to respond in that spirit.

The hon. Member for Twickenham (Dr. Cable) quoted from a speech that I gave in March, in which I set out in detail our views at the time on the private equity debate. Since then, there has been a great deal of further debate in the newspapers, and there looks set to be a very interesting report from the Treasury Committee, which held its evidence-gathering sessions in recent weeks. I will read just one quote from that speech, as it will set the context, and show that I accept and agree with many of the points that the hon. Member for Fareham made. I said:

“Private equity, like any other form of ownership, has good and bad aspects—and it has features of both long-termism and short-termism. But the evidence does not suggest that Government has any intrinsic reason either to "favour" private equity or to do the opposite.

Our aim should be to support economic dynamism and long-term investment and job creation. And the Government's objectives in the field of private equity should be no different from its objectives in relation to any other form of ownership: to promote an environment of long-term, sustainable business success, underpinned by a strong culture of clear disclosure to, and engagement with, underlying investors. This is the way to ensure that "good" long-term investment propositions prosper.”

Everything that we are doing in the field of private equity is in the context of that overall objective.

The hon. Member for Fareham will not be surprised that I am not going to support his proposals for a further report. That is not because I am averse to reports but because rather a lot of reports on this issue are already on the table or being prepared. I have already referred to the forthcoming report by the Treasury. In my speech in March, I mentioned a report already provided by the Financial Services Authority into private equity’s potential systemic implications for the stability of financial markets. On disclosure and transparency, Sir David Walker is chairing an independent working party to develop a voluntary “comply or explain” code to improve private equity’s transparency and levels of disclosure. The hon. Gentleman mentioned a review that I have promised for the pre-Budget report of the rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals. There is also the forthcoming report on improving the UK environment for enterprise and venture capital commissioned by the shadow Chancellor from the European School of Management, which is to report by early autumn before the Treasury taxation reviews conclude.

In other words, there are a rather a lot of reports coming up. Before the pre-Budget report and following the shadow Chancellor’s review, we will want to take stock across the piece and respond properly to recommendations by the Treasury Committee, as we always have in other policy areas. I am not sure that another report is necessary.

The hon. Member for Fareham tried to draw out some of our thinking on these tax issues. Both aspects of the new clause relate to the tax treatment of the private equity industry. As I have already said, the Government do not believe that one form of ownership should be inherently preferred over another. Rather, our aim should be to support economic dynamism and long-term investment and job creation. That is also the objective of our tax system. We do not believe that private equity should be favoured in a particular way, including in tax terms. Therefore, the capital gains tax treatment available for gains arising from carried interest and corporate tax deductions for interest—the two aspects mentioned in the new clause—is available to all taxpayers, not only to private equity investors in any preferential way compared with any other investor.

Let me deal first with carried interest. The hon. Member for Fareham referred to a memorandum of understanding published in 2003. To set that properly in context, a previous memorandum of understanding had been produced in 1987 by the Inland Revenue and the British Private Equity and Venture Capital Association, which made it clear that carried interest would continue to be taxed to capital gains, not income. During the 2003 Finance Bill debate on this issue, which neither I nor the hon. Member for Fareham will remember—I am sure that my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) was not only there but commented on the explanatory notes—concern was expressed, particularly by the former Member for Arundel and South Downs, that changes being introduced to schedule 22, covering the whole range of employment-related securities, might have a negative impact on the capital gains tax treatment of venture capital.

As a result of those debates, the memorandum of understanding that had been agreed in 1987 was re-examined and a new one, again agreed between the Revenue and the British Private Equity and Venture Capital Association was published. It provided guidance to the industry, but, importantly, did not affect the operation of the law in the Finance Act 2003.

That memorandum of understanding confirms that returns received through carried interest should, in law, in the circumstances that it sets out—in plain vanilla form, which is a technical tax term that means “in a simple and straightforward way”—be taxed as capital gains. No concessions were made to the private equity industry at the time, but the memorandum of understanding clearly set out how the underlying legislation applied in the case of carried interest. It set that out in a way that would apply to any taxpayer who received such employment-related securities.

Is my hon. Friend saying that the memorandum of understanding of 25 July 2003 was instigated or drawn up at the behest of Howard Flight, who was then the hon. Member for Arundel and South Downs?

Yes. There is no controversy about that. In those Finance Bill debates, concern was expressed that the schedule might have an adverse impact on the venture capital industry. Consequently, a memorandum of understanding was drawn up to give guidance to make it clear that, on the basis of the proper application of the law to all taxpayers and investors, including the private equity industry, some of the fears expressed would not be realised.

Clearly, since then the salience of and media interest in such issues have increased. That applies especially to the way in which business asset taper relief is available to taxpayers who make gains on business assets. The hon. Member for Twickenham explained the genesis of the business taper relief and his principled position on opposing it. I could describe his position as almost Lawsonesque in its consistency—the former Chancellor of the Exchequer Nigel Lawson strongly believed that capital gains should be taxed at 40 per cent., not a lower rate. He believed that any lower rate between the top rate of income tax and capital gains tax would lead inevitably to avoidance. I understand the Lawsonian views that the hon. Member for Twickenham expressed. I take them at face value, not simply because he needs the £5 billion or so to pay for the tax cuts that he wants to promise others.

We have always perceived the purpose of the business taper relief as an important means of encouraging investment and rewarding serial entrepreneurs, business angels and venture capitalists, who are prepared to take risks in growing companies. We probably agree with Conservative Members about that.

There are no special rules for private equity fund managers and we do not collect information on the specific tax reliefs that private equity fund managers receive. It is therefore not possible to identify the particular gains that are made on carried interest or to disaggregate the proportion of the cost of the overall relief, which is approximately £4.78 billion in 2006-07. If we produced the report that the hon. Member for Fareham requested, it would make less interesting reading than he might like.

However, I believe that the hon. Gentleman raised the matter because he wants to know the direction of the review. As he knows, although an effective capital gains regime is vital to encourage enterprise and stimulate investment and entrepreneurship, it must also distinguish between employment reward and capital gains and ensure that a proper balance is struck. Indeed, the shadow Chancellor made the same point when announcing his review last week. He said:

“As leading members of the private equity industry acknowledge, if it looks like income then it would be peculiar not to tax it like income… But if it looks like genuine risk-taking and entrepreneurship then we should do everything to encourage it.”

I agree with that sentiment.

That is why we are currently reviewing the taxation of a range of employment-related securities, which private equity and non-private equity companies alike use to ensure that the distinction is correctly drawn. If it reassures the hon. Member for Fareham and makes it easier for him to withdraw the motion, I assure him that we will provide an update on that review, too, at the time of the pre-Budget report. I shall make sure that, while avoiding excessive bureaucratic duplication and even more reports, we provide such an update on those issues at the time of the pre-Budget report.

On the issue of corporate tax deductions for interest payments, I can confirm that the goal of the Treasury review that I announced earlier this year is to determine whether the rules that apply to private and non-private equity investments alike are working as intended. That review is looking at the way in which the rules are working in the light of market developments but, as I said in my March speech, the deductibility of interest as a business expense for tax purposes is a fundamental principle of our tax system. We are not reviewing the basic principle that interest should in general be treated as a business expense and is deductible for taxable profits for companies in any form of ownership. However, we aim to ensure that where shareholder debt replaces the equity element in high-leverage deals, it does so consistent with our intention that interest on debt should be tax deductible. Equity, however, is treated differently, to make sure that we are as consistent as possible in our aim of providing a level playing field. As I said, the review will be published at the time of the pre-Budget report.

The hon. Member for Fareham wondered whether or not Government Members were sending mixed messages about private equity. From the Treasury’s point of view, we have sent a clear message: we believe that private equity can play an important role in the economy by driving change, and by promoting employment and investment. There are some bad private equity deals, however, in exactly the same way that there are some poorly performing public companies. It is much better to look at the conditions to support long-term investment than take a particular view on private equity. I responded to an Adjournment debate introduced by a potential leadership candidate— that candidacy did not last very long—on those matters, so we have debated those issues fully in the House. I do not think that Ministers or the Treasury have sent mixed messages, but the same could not be said of Opposition Members. The shadow Chancellor’s review was reported by the Financial Times on 22 June under the headline, “Tories back higher taxes for private equity”. The article continued:

“The Conservatives have signalled they would support higher taxes for private equity executives, increasing the political momentum for a clampdown this autumn.”

The BBC website reported:

“Mr. Osborne’s inquiry appears to blur the traditional left-right political divisions, with the Tories appearing to be tougher on the super-rich than Labour.”

In his speech earlier this year to the British Private Equity And Venture Capital Association—I think that that the hon. Member for Twickenham referred to that—the shadow Chancellor said:

“Listen to the critics and you would think that the only winners were a secretive bunch of millionaires. But the real winners are the millions of people with pensions invested in the funds that invest in you…The importance of your contribution to our economy is, I believe, rightly reflected in the tax treatment that you receive…I will speak up for your industry and the wealth it creates. I will not make any moves that discriminate against the private equity industry.”

Perhaps we should reconsider our position—perhaps a report should be published, although the shadow Chancellor’s report will be issued before the pre-Budget report, so there will be plenty of time to reflect on its findings. It is often said that the Opposition parties are good these days at spin, but either they have contradicted the shadow Chancellor’s speech in March or the FT misunderstood the story. In any case, given the number of reports that have been published, I do not think that we will gain enlightenment from a further report. Instead, I encourage hon. Members to look forward to the report by the Treasury Committee with interest. We will respond on all those matters at the time of the pre-Budget report. On that basis, I suggest that the House reject the new clause.

I will take no lessons from the Economic Secretary on spin. We have seen quite enough of his handiwork in the past few weeks. He ought to stick to his job as Economic Secretary, rather than engaging in media management or trying to give lessons to others.

The hon. Gentleman was a little disappointing in his remarks. We share some common ground. We both recognise that the reliefs specified in my new clause are available to all, not exclusively to private equity. However, we are in danger of having a debate in an information vacuum. Questions are being asked about how much the reliefs are worth. There were questions in the Treasury Committee last week, when the people from private equity firms were asked how much capital gains tax was being paid. It would have been helpful if that information were available. Without it, it is difficult for that debate to take place in a rational and well reasoned fashion. The information would provide a context or framework. There is no point in pushing for a report which would consist of a series of blank pages.

In the debate about private equity, we should be careful about drawing the wrong conclusions, reading headlines, not substance, or being distracted by other issues. It is regrettable that the information is not available. The Treasury Ministers may be sending out a clear message, but I am not sure it is the same message as is being given out by their colleagues on the Back Benches or in other positions in Government. No doubt that will all change after Wednesday, in its own inimitable style.

We need to make sure that a proper debate takes place. The fact that the information is not available should be made clear to all the participants. I hope members of the Treasury Committee will read this brief debate and understand the constraints under which everyone is working in the debate. The Minister rightly pointed out the continuation of the memorandum of understanding from a treatment agreed in 1987, and he spoke about the Lawsonian purposefulness of the hon. Member for Twickenham (Dr. Cable).

Of course, the distinction between income and capital has become more important as the capital gains tax reforms made by the Chancellor have unfolded, so it has become a much more important issue when one can be taxed at 10 per cent. and one at 40 per cent. Although the MOU has been around for 40 years, it has been brought into sharper focus as a consequence of those changes. It therefore behoves us all to think carefully about it.

Given that there is nothing to be said in the report, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 14

Assessment of effects of taxation changes on different earnings groups

‘(1) It is the duty of a Minister of the Crown, when proposing changes to personal taxation (whether or not taking effect in a future financial year), to prepare and lay before the House of Commons an assessment of the effects of the proposed changes on different earnings groups.

(2) For the purposes of subsection (1) “different earnings groups” means groups representing each earnings decile; and “effects” includes changes in net disposable income and changes in the relative share of national wealth accounted for by each earnings decile.

(3) If the proposed changes mentioned in subsection (1) appear likely to have an adverse effect on groups in the lowest quintile of earnings, the changes shall not take effect unless they are accompanied by transitional relief measures.

(4) “Transitional relief measures” in subsection (3) means measures designed to ensure that any adverse effects of a kind mentioned in that subsection are phased over such a reasonable period as will avoid abrupt changes in the net disposable income of the relevant earnings group.’.—[Mr. Frank Field.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

I was a few minutes late because I went to check the letter board, hoping that I would have an answer to the question that I first tabled on 16 April and retabled on 30 April. On three occasions on the Floor of the House, I have asked why I had not received a reply. Perhaps, by leave of the House, I may be able to respond at the end of the debate, by which time I may be able to read the parliamentary answer giving us the information that we require. That information is by what amount our constituents will lose out by the abolition of the 10p standard rate of tax, and how many of them and which groups will be affected.

Let me declare an interest: I favour the abolition of the 10p rate of tax. I believe that most of our constituents think about a headline rate, and that is the standard rate. Any move that brings the standard rate down is welcome to me. Indeed, long before I came to the House, I was advocating the abolition of tax allowances so that we could get the standard rate down even further than it has fallen today and is proposed in the Budget.

It is clear from our postbags around the country that three groups stand to lose from the change, and they may not be covered by the tax credits changes that have already been announced and the child benefit changes that might be announced next year. The first group is lower-income households that will see their tax burden increase as a result of the abolition of the 10p rate, while those on higher incomes see their tax take fall. One person put it in powerful terms in their letter to me by saying that they never thought that they would see a Labour Chancellor of the Exchequer redistributing from poorer to richer households. As to the numbers that are affected, I hope, as I said, to read the parliamentary answer in a moment.

Secondly, a number of voters around the country have said that, although their husbands will benefit from cuts in the standard rate, they will lose income through the abolition of the 10p rate because they are viewed in traditional terms as the minor earners in the household, although most such households would not survive without their two earners. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) mentioned the third group—this is the first time we have raised the matter in the House—which is people who have retired early, largely because of ill health, and who do not gain the advantages of the additional tax allowances that people gain once they reach the standard retirement age. It could be argued that the change in the tax rates will be offset in that way.

The new clause therefore says that, before the House of Commons considers measures that affect our constituents’ living standards, particularly where we are decreasing them, the Government should give us the information as part of the Budget, so that we know the numbers and the extent to which that cut in income is taking place. We know that the measures before us will affect some people who will lose out in relation to the 10p rate. I am not sure how many, but I am hoping that that will be revealed.

I know that the right hon. Gentleman is expecting a formal answer from the Minister, and I hope that he gets one. The calculations that we have say that 836,000 people in Scotland will suffer because of the change. He might like to consider the UK figure as somewhere between 8 million and 9 million people, which is a huge number. Specifically, 52 per cent. of the workers in Kirkcaldy and Cowdenbeath, who earn less than £17,000 would be worse off. I am sure that that figure may be replicated in similar constituencies around the country.

That contribution was valuable not only because of the point that was made, but because it gave me a chance to read the parliamentary answer, so I shall read the heart of the mystery into the record before I sit down.

The next part of the new clause is supported on other Benches. Some people try to get ex-leaders of the Liberal party to join their cause; my attempts were more modest, but I hope more effective in engaging the two Liberal Democrats on the Front Bench, the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Twickenham (Dr. Cable). We should have a guarantee that, before the proposed measures came into effect with the next Finance Bill, some transitional form of relief would be announced for people who were going to lose money.

After a first reading of the parliamentary answer—I am well aware of what the question was—we know that 31 million taxpayers have benefited from the 10p standard rate of tax, and that some 28 million of them stand to gain as a result of the 20p rate. That means that 3 million people will lose out—31 million minus 28 million—but the written answer may contain further details.

First, I think that my right hon. Friend must deduct pensioners who would gain through increases in personal allowances for pensions from that 3 million. Secondly, a fourth category in addition to the three that he delineated is women aged between 60 and 65 on modest incomes, who will lose out through the abolition of the 10p rate, but who will not gain through the rise in personal tax allowances, because they are not yet 65.

I willingly add that fourth group who will lose out because of the measure.

The second paragraph of the written answer states that

“four in five households will be better off or see no change in household income”.

That means that one in five households will lose out. The person who kindly gave me this answer is right to say that the final number will depend on whether people are claiming tax credits, whether there are changes in the national minimum wage and whether there are changes to child benefits.

The truth is that, as we allow the Finance Bill to proceed tonight, four out of five households will benefit, but one in five will not, and the one in five are among our poorest constituents who work. I think it shameful that the Government have run away from giving us that information since the middle of April. Unless I am wrong and the Chief Secretary has some different news, we are not prepared to introduce transitional relief to protect a group who are doing everything that the Government have asked them to do, which is to work, to work harder and to maintain their families. Those households are the backbone of this country, and I do not believe that we should kick them.

The Opposition welcome the opportunity to debate the impact of tax changes on different income decile groups. New clause 14 is a constructive contribution to that important debate and we sympathise with the sentiment that underlies it. It is, of course, vital for any Chancellor to carry out a proper and effective empirical assessment of the impact of proposed tax changes, and I shall explain why I believe that that is particularly important in relation to those on low incomes—the right hon. Member for Birkenhead (Mr. Field) has already stated many of the reasons.

We understand the arguments in favour of using transitional measures, where appropriate, to ease the hardship that tax rises can cause. However, it is with regret that I say that, although we will not vote against new clause 14, we cannot support it this evening, because we are concerned how it would work in practice were it actually to be written into legislation. For example, we have some concerns about how feasible it is always to assess the changes in the relative share of national wealth. That assessment would not be easy, because it would be difficult to find the data. Unlike the case of income, there is no obligation to report one’s wealth to the Inland Revenue.

We also have some concerns about the idea that all tax measures that fall within the scope of the new clause must be phased over a reasonable period, because importing that obligation into statute as a general rule might be too inflexible. As I will discuss—no doubt the Chief Secretary will discuss this, too—the Government could take a number of different measures to mitigate the impact of a tax change, which might involve phasing in a measure or using the benefits system. Indeed, it is important that we debate the use of tax credits in that context.

Furthermore, I fear that the new clause might mean that almost all tax changes would have to be subjected to phased implementation, and while such measures would certainly be justifiable and welcome in some contexts, we hesitate to impose a blanket obligation in all cases. We also believe that the underlying issues raised by the new clause—the importance of moving to greater transparency and objectivity in tax policy—are so important as to merit further detailed consideration before we could make a commitment to a proposal such as this. That is one reason why the shadow Chancellor asked my noble Friend Lord Howe a few months ago to investigate how we might implement some of our independent tax reform commission’s proposals for improving the way in which we make and scrutinise tax law.

At Easter, the hon. Lady could be cast in the role of Pontius Pilate without any difficulties given the hand-washing that is being done. For those of our constituents—she will have some—who will be made worse off by this measure, what changes do the Opposition propose to protect their very modest standard of living?

One of the best changes would be a change of Government. I emphasise that we believe that putting pressure on the Treasury to carry out the sort of analysis referred to in the new clause would make a significant contribution not only to improving the quality of our tax law but to enhancing and improving the fairness of future Budgets, and dealing with some of the grave concerns that the right hon. Gentleman raises. We believe that the sort of analysis provided for in the clause would help to ground Budget decisions on empirical evidence and reduce the opportunity to use them for cynical political tricks.

As we have stated repeatedly in the Budget debate, on Second Reading and in Committee, we are concerned about the impact of the Chancellor’s Budget on those on low incomes. As the right hon. Member for Birkenhead pointed out today, and as the shadow Chancellor pointed out in his speech in the Budget debate, the abolition of the 10p band amounts to a shift in the tax burden from those on middle incomes to those on low incomes.

We have heard that one in five households will be worse off as a result of the Budget—5.3 million families—and many of those will be people on low incomes hit hard by the loss of the 10p band. Some of the people worst hit by the changes will be those on wages of between £5,225 and £18,000. The right hon. Gentleman is right that I have many of those in my constituency who are concerned about the changes—cleaners, nurses, shop assistants and catering workers, not millionaire executives.

In giving evidence to the Treasury Committee in March, Robert Chote of the Institute for Fiscal Studies set out a number of groups of people who will lose out, several of which have been mentioned this evening, but it is worth going through them in turn. According to Mr. Chote, 2.2 million of those losing out are single working people with no children who are not getting the working tax credit because they earn more than £12,500 but less than £18,000, or because they work fewer than 30 hours, or because they are too young. He states that 1.2 million are two-earner couples with no children. They may not qualify for the working tax credit or they may fail to take it up. They may also be in the position where the two earners both lose under the income tax and national insurance changes, but there is only one gain from the tax credit, which is assessed per household. A couple both earning £7,445 would suffer the maximum loss of £446.

Mr. Chote states that 400,000 are one-earner couples without children, most of them because they will be in an income range of about £17,000 to £18,5000 where they are not compensated by tax credits. There are 700,000 two-earner couples with children who lose twice from the income tax and national insurance changes, but gain only once from child tax credit or working tax credit.

The hon. Member for Wolverhampton, South-West (Rob Marris) adverted to the point that 300,000 of these people are tax-paying women between the ages of 60 and 64 who do not get tax credits and are too young to be compensated by the rise in the pensioner tax allowance. A further 500,000 are non-workers who are early retirees or who are on incapacity benefit.

In making an effective assessment of the impact of tax changes on different income decile groups as provided for by new clause 14, it is critical that the Chancellor take into account the wider economic picture. The hardship caused by tax increases is clearly more keenly felt when families feel that their household budget is already under strain. With inflation hitting a 16-year high earlier this year, many families on lower incomes are struggling to make ends meet. Last year, inflation was almost double the EU average, and disposable incomes rose at the slowest rate for nearly a quarter of a century. Two weeks ago, the Office for National Statistics announced that, for the sixth month in a row, regular pay failed to keep pace with inflation and real living standards fell again.

The Council of Mortgage Lenders also recently reported that home owners are suffering the highest mortgage burden for 15 years and that further rate rises could be on the cards. Personal debt now stands at a staggering £1.3 trillion in Britain, and problem debt is worsening by the day. All these factors should be taken into account before the Chancellor imposes tax increases on Britain’s hard-working families.

I thank the hon. Lady for reading into the record the entire list of categories of people who are suffering, and for her subsequent comments. I believe that one of the worst factors in this is the fact that the unclaimed working tax credit for those who are entitled to it amounted to about £5 billion last year. She will correct me if I am wrong. Does she agree that that merely exacerbates the problem and makes it far worse than it ought to be, and that it is a failure that is purely in the hands of the Government?

The hon. Gentleman makes a strong point, and I shall come to that issue. If the Government are relying on tax credits to soften the blow of the abolition of the 10p band, they must do something to improve the way in which the system works and to raise take-up rates. That is critical if we are not to see the hardship caused by the Budget becoming really significant.

In making changes to tax rates and assessing their impact on different income groups, the Chancellor should bear in mind the pattern of poverty in 21st century Britain. According to the Institute for Fiscal Studies, poverty among adults without dependent children—a group significantly affected by the tax changes in the Budget—is now at its highest point since records began in 1961. That group now makes up one third of the total of Britain’s poor.

A number of deeply worrying points emerged from the most recent Department for Work and Pensions figures on poverty, covering the period between 2004-05 and 2005-06. These were analysed by the IFS and show that relative poverty and income inequality actually got worse last year. The number of people in relative poverty rose from 12.1 million to 12.8 million.

A range of measures demonstrates the recent increase in inequality of income. The most commonly used measurement, the Gini coefficient, tells us that income inequality has increased in total during the Chancellor’s 10 years at No. 11 Downing street. The DWP figures also show that the number of people living in absolute poverty rose by 400,000 to 7.4 million—12.6 per cent. of the population—last year. There are more people in deep poverty now than when the Chancellor entered Downing street. There are 600,000 more people on less than 40 per cent. of median income now than there were in 1997, and the poor are getting poorer. Recent Government data show that the real incomes of the poorest 20 per cent. actually fell last year.

Many people—not just those on this side of the House—have expressed concern about this state of affairs and about the impact of the Budget on tackling poverty. The right hon. Member for Birkenhead today repeated his concerns about the impact of the Budget on those on low incomes, but he was not alone among his Labour colleagues in expressing anxiety. As the hon. Member for Birmingham, Selly Oak (Lynne Jones) acknowledged, the Budget neglected poorer people who have no children. The hon. Member for Coventry, North-West (Mr. Robinson) has pointed out that the Budget is hurting many people whom the Government never set out to hurt, and the right hon. Member for Darlington (Mr. Milburn) admitted in the Budget debate last year that, under Labour,

“poverty has become more entrenched.”—[Official Report, 28 March 2006; Vol. 444, c. 710.]

Turning to the point raised by the hon. Member for Dundee, East (Stewart Hosie), in assessing the impact of tax changes on different decile groups, it is critical to look at the marginal rates of taxation that they face, as they have a significant impact on incentives to work and to emerge from benefit dependency. Mike Warburton of Grant Thornton said after the Budget:

“Families on low incomes will really lose out because they will pay a marginal rate of tax at 70 per cent. starting from an earlier point.”

With the abolition of the 10p band and the increase in the tax credit withdrawal rate, the Budget leaves many low-income families with marginal tax rates of even more than 70 per cent., as their benefits are withdrawn with each extra pound they earn. Of course, such rates make it much harder to escape the poverty trap.

In conducting an assessment of this issue in relation to different income groups, the Chancellor must take into account the interaction with the tax credit system. To return to the point made in an intervention by the right hon. Member for Birkenhead, one of the ways in which we can help those who are hit hard by the Budget is to get the tax credit system to work effectively, and to reform it so that we grapple with the chaos that has characterised it over the past couple of years. As Francesca Largerberg of the Institute of Chartered Accountants said after the Budget:

“It is now seemingly necessary for those with incomes between £5,225 and £18,605 to get to grips with the tax credit system and claim in order to negate their losses.”

Both the Chancellor and the Chief Secretary have defended the abolition of the 10p band on the ground that tax credits will compensate some of the families affected. As I have set out, however, not everyone qualifies for tax credits, and as we heard from the hon. Member for Dundee, East, not everyone claims them. As Ms Largerberg went on to explain:

“Tax credits may in some cases claw back lost income but they are often difficult to claim and some lower earners may not be eligible”.

The figures for the uptake of working tax credit among childless households—as we have established, a group significantly affected by the loss of the 10p band—are as low as 25 per cent. of the total entitlement and only 19 per cent. of eligible claimants. If the effect of a tax increase is to push more people into the tax credit system, one must assess the way in which the system is working to analyse properly the impact of the change proposed. The latest available figures show a depressing picture. Of 5 million payments made, more than 2 million were overpaid and almost 1 million were underpaid, which means that more than half the payments in the system were wrong. At least £200 million has been lost through fraud. The tax credit website had to be taken offline because of wholesale attack by fraudsters.

As the Chief Secretary will be well aware, every MP has had constituents coming to advice surgeries to explain their desperate problems with huge bills for overpayment that they simply cannot afford to meet. The former Secretary of State for Work and Pensions, the right hon. Member for Sheffield, Brightside (Mr. Blunkett) said:

“The tax credit system is a shambles—such a shambles that I’ve had to help out one of my constituents financially, only the second time that I ever have done this, and the first was for a child. I don’t know if I will get the money back. I suppose it is a foolish thing to do, and it has to be on the pain of death that they don't tell people. But what else can you do when the tax credit system is such a total mess?”

Sir John Bourn, the Comptroller and Auditor General, said:

“People have been helped, but why do that in a way which causes such misery? And we’ve spent far more than necessary because we’ve had to write off the hundreds of millions of pounds we simply can’t get back.”

The right hon. Member for Birkenhead has said:

“Tax credits are clearly the bluntest of anti-poverty weapons and are the equivalent of attempting delicate key hole surgery with a hacksaw.”

To conclude, it is regrettable that the Chancellor has taken so long to answer the questions tabled by the right hon. Member for Birkenhead regarding how his Budget has impacted on different groups. That is further proof that the kind of serious and thoughtful assessment of the impact of tax rises on different income deciles envisaged by new clause 14 was very far from the Chancellor’s mind in preparing his Budget. He was so desperate to grab the headlines with his basic rate tax cut con that he was prepared to do anything to achieve it, even if that meant hardship for people grappling with poverty, low incomes, falling living standards, problem debt and rising interest rates. Because he wanted to pull a fast one during the Budget debate, the 10p band had to go.

Of all the critical comment that followed the Budget debate, that of a former Member of this House, Michael Portillo, writing in The Sunday Times about the closing seconds of the Chancellor’s Budget speech, summed up the position most effectively:

“30 seconds of theatre…had made poorer all those on low incomes who pay tax only or mainly at 10 per cent. Some will be compensated with tax credits, but not all. The chancellor cannot explain why he once thought that the lowest earners needed protection…but now has changed his mind. Those at the bottom of the pile have been sacrificed for the sake of a quick laugh. Politics, it seems, is but a game played with people’s lives. It is astonishing that a chancellor who has worked with some success to redistribute income has, in his last budget, penalised the poorest but rewarded higher rate taxpayers.”

We need to put this very important debate in context. The hon. Member for Chipping Barnet (Mrs. Villiers) did that a bit, although somewhat grudgingly, and she gave some useful figures. However, it needs to be put in the context of what the Government have done in 10 years to address poverty. On pensioner poverty, they have introduced the winter fuel allowance, the minimum income guarantee and the pension credit. Pensioner poverty has come down a lot. There are problems with take-up and so on, but the Government have addressed the situation of older people.

Has my hon. Friend seen the report by the Chartered Institute of Taxation which calls for tax reform for older people on low incomes, not least because face-to-face advice in tax offices and inquiry centres is being withdrawn, home visits to the elderly and disabled are disappearing, and paper forms are disappearing in favour of the telephone and the internet, which many older people find difficult to use? How can they get their tax right in the fluid situation that we are discussing? Does he accept that there is a problem?

While I do not want to go too far down that path, I agree that there may be difficulties for some pensioners, although one has to be careful not to aggregate all pensioners together. For example, almost 90 per cent. of pensioners over the age of 85 have a bank account, despite all the talk about the Department for Work and Pensions and the Post Office card account. However, one has to make special arrangements for vulnerable pensioners, and the Government have tried to do that.

In terms of family poverty, we have had tax credits, and child benefit has gone up substantially, especially for the first child. The minimum wage has done a lot to address poverty and family poverty in particular. Above all, we have 2.5 million more jobs.

The point that has not been made about new clause 14 is that the proposals would take effect from April 2008. They are not in this Finance Bill. That gives us a chance to pause for reflection and to consider the figures that have been mentioned. It is vital that we get more clarity from the Government on those. According to table A1 on page 208 of the Red Book, the drop from 22 to 20 per cent. in the basic rate of income tax will cost the Treasury £8 billion in 2008-09, the first year it is due to come in. However, the cost to the taxpayer of abolishing the starting rate of 10p in the £1 in tax year 2008-09 will be £7.3 billion.

I am not an accountant, but my reckoning is that every hon. Member will benefit from that. We are all higher-rate taxpayers, and they are much less than 10 per cent. of the working population in this country. We can all declare an interest in the 10, 20 and 22 per cent. rate, but intuitively the change says to me that there is a shift in the wrong direction, which is why I want more figures. Depending on those figures, my right hon. Friend the Member for Birkenhead (Mr. Field) may have a point about transitional relief, but it is difficult for him—he has not suggested otherwise—and the rest of us to know about transitional relief until we know what we are transitioning from. We have not yet got clarity on the figures.

I happen to think that we will get those figures well before next April, which is when the transition is due to take place, and we can have a look at them then. For that reason, I would not support my right hon. Friend were he to press the new clause to a vote, although I understand the spirit of it. I am confident—perhaps naively—that we will get the figures. I urge the Government to produce more figures, and I hope that my right hon. Friend the Chief Secretary will do so. Depending on those, the Government might need to reconsider the matter. That is my initial reaction to the debate in the press, the Chamber and Parliament on the effect of abolishing the starting rate and the corresponding cut in the basic rate of income tax.

It may well be that when the Government have had another look at the issue and we have fuller figures, those of us—I count myself as one of them—who are loyal Back-Bench MPs by and large, but who are uneasy about the direction of the change, may have our fears stilled. At the moment, however, without that information, we still have those fears.

The loyalty of the hon. Member for Wolverhampton, South-West (Rob Marris) is being stretched so far that he is having to justify his intention to vote against the new clause on the basis that we need more information and we have another nine months in which to get it, but that is a weak argument. These tax changes were the centrepiece of the Chancellor’s last Budget. Does it matter when they will be implemented? In the closing sentence of the Budget, the Chancellor said that

“to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p”.

From the debates on Second Reading, in Committee and now on Report, it is clear that, for many people in work and families, the Budget will not make the tax system fairer. People paying a higher rate of tax will benefit, and we are not sure why that will make the tax system fairer.

If the information had been made available at the point at which the Chancellor made that announcement— in the Red Book, which also gave details of how the decisions would interact with each other—everyone would have been able to make a fair assessment. The reality is that after the Chancellor sat down no one had any idea how the cut in the basic rate of taxation would be funded until, after leafing as rapidly as they could through the Red Book, they discovered that it was through the abolition of the 10p rate, a decision referred to by the Chancellor with the words:

“With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax.”—[Official Report, 21 March 2007; Vol. 458, c. 828.]

It is ludicrous that such comments can be made, but it is so difficult to find the information about how that will be funded, let alone the impact that it will have on many households.

Other hon. Members have spoken about the groups of people who will be affected. In particular, they have mentioned those on very low incomes, those who work part time—perhaps many of them will be women—couples with no children and a particular group of pensioners. Another group is those aged under 25 who are on low incomes, because they do not qualify for working tax credits. For those people, the tax system will not reward their work, ensure that they are better off or become fairer for them. On the surface the changes look attractive, but there is a lot going on underneath and it is not clear how it will all interact.

The hon. Member for Chipping Barnet (Mrs. Villiers) made some good points about the statistics and bombarded the House with useful information. This is outrageous, and the right hon. Member for Birkenhead (Mr. Field) is being very reasonable in his new clause. All he is saying is that we should be upfront about matters. The differential impact on different groups of taxpayers should be made clear at the point at which the announcements are made. Tribute must be paid to the right hon. Gentleman for teasing out much of the information in the Budget debate and during the progress of the Bill.

If the Minister is not prepared to accept the new clause, I wonder whether he would consider an alternative way of pursuing the matter. The Statistics and Registration Service Bill will come back before us in the near future, and perhaps the national statistician might be able to call in the issue and for the information to be made available as a national statistic.

We have a sense of the impact that the changes will have, and much of that is thanks to the work of the Institute for Fiscal Studies, whose response to the Budget provided a lot of information. I do not see any reason why the Treasury could not undertake that work in advance and publish at the same time as the Budget. Some very compelling arguments have been made. It is crucial that the information is made available at the time that the changes are announced, instead of when they are implemented.

I welcome this debate, and all hon. Members will understand the motivation and thinking behind the new clause moved with characteristic conviction by my right hon. Friend the Member for Birkenhead (Mr. Field). However, I hope that I can persuade the House that the proposal is impractical and that, if we are to assess the impact of personal tax changes on a group of taxpayers, we need to do so over a period longer than that covered by a single Budget.

It is worth reflecting on what this year’s Budget package will achieve. There will be a significant simplification of the income tax system, which my right hon. Friend has welcomed, and the reduction in the basic rate to 20p. A further 200,000 children will be taken out of poverty, on top of the 600,000 helped in that way by previous measures. More than 500,000 pensioners will be taken out of tax entirely, and the biggest proportionate gains from the Budget tax package will go to those in the lowest two deciles of income.

That latter fact is something that I want to emphasise, especially in light of the observations made by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), and it is made clear in the analysis presented by the Institute for Fiscal Studies to which a number of speakers have referred. That analysis is still available on the IFS website, and I was checking it out earlier today. It is a very striking attribute of the Budget that the biggest proportionate gains go to the households on the lowest incomes.

Does that take into account people claiming their entitlement to tax credits? One problem is that some people are too young to claim tax credits, and another is that many people simply do not do so.

In fact, the analysis does take that into account. I refer the hon. Lady to the slide in the Budget analysis on the IFS website that sets out the relevant figures. The slide shows two bars for each decile—one on the assumption of 100 per cent. take-up, and the other on the assumption of 33 per cent. take-up of tax credits by childless families. The statement that I have made about where the biggest proportionate gains fall applies in both those cases.

I understand that Treasury officials acknowledged to the Treasury Committee that their figures were based on the assumption that the take-up of working tax credits would amount to only 25 per cent. That does not give one a lot of confidence in the system’s effectiveness.

That depends on the figures to which the hon. Lady is referring. I am not sure which they are, but later in my remarks I will deal with the take-up of tax credits. That is an important matter, but the take-up of tax credit for family income support is much greater than under any previous system that we have had in the UK.

At this early stage in his remarks, will the Chief Secretary confirm that the take-up of family tax credits is at around 80 per cent. but that, according to the most recent report, unclaimed working tax credits amounted to £5 billion last year? Does he agree that the take-up rate for working tax credits was about 60 per cent?

I can confirm that the take-up of tax credits among the lowest-income families is well above 90 per cent. I do not know the basis for the figure quoted by the hon. Gentleman, but the take-up is very high among those who need the greatest support. It is certainly much higher than that achieved under any previous system of family income support.

Overall, the fiscally neutral Budget represents a £2.5 billion reduction in personal tax—that is, tax plus tax credits. The director of the IFS said:

“To reform the system in a useful way within tight financial constraints and with only modest gains and losses should be a cause for congratulation.”

It is important that the House recognise the significance of the achievements secured by the Budget package.

This Budget builds on the progress made in earlier Budgets. There has been some discussion, rightly and fairly, of the position of pensioners. This year, the Government are spending in real terms about £11.5 billion more on pensioners than if we had left the system as it was in 1997, and nearly half that extra spending—more than £5 billion—is going to the least well-off third of pensioners. On average, they are £2,300 a year or £44 a week better off. Other groups in the taxpayer population referred to in the debate have benefited from other changes. We need to make a full assessment of the effects on people of changes introduced over a period rather than insisting on the basis of one year’s tax changes that there should be transitional protection.

The Budget package forms the next stage in a programme to offer more support for work, for families and for pensioners. It includes eight separate reforms and the House will have the opportunity to debate each as they are put into legislation over the next two years. When the package is fully implemented, 6 million families with children will be better off and the gain to work will rise by £50 a year for many, up to £350 a year for some, helping to work make pay. The package reduces and simplifies personal taxation within a fiscally neutral Budget, protecting and boosting the incomes of vulnerable groups, with the number of losers minimised. I am not saying that there are none, but the number has effectively been minimised.

The new clause would require transitional relief measures so that any adverse effects of personal tax measures are phased in over a period. That would not be the right thing to do for two reasons. The first is complexity—I know that my right hon. Friend the Member for Birkenhead is sensitive about that point. Income tax is paid by more than 30 million people —I think my right hon. Friend said 31 million. Transitional, and thus temporary, changes would add significant complexity to a system that is central to Government finances and to the maintenance of strong public services.

The impact of the proposal would depend on the form taken by the transitional measures. My right hon. Friend and I had a brief conversation about one model, which is, if I understood it rightly, that taxpayers could choose whether they were taxed on the basis of the new system or the old. I think he realised that would be an extremely complex system to administer and that it would impose a large burden on employers as well as on Revenue and Customs. In debating the new clause, I am in some difficulty, because I am not sure what kind of transitional measures we are talking about. The only ones I can think of, which my right hon. Friend and I briefly discussed, would be impractical. Indeed, it would be impossible to implement such a dual system in time for next year.

My right hon. Friend says that he is in some difficulty because he does not understand the nature of transitional relief, but we are still waiting for him to give us a proper breakdown of who benefits and who loses. His difficulties are nowhere near as great as ours in trying to understand the Government’s position.

The point I was making is that I do not think that there are any practical transitional measures that we could adopt. If the House were to legislate, there would have to be transitional relief measures. We would need to have some idea that a practical package were available for us to implement and I do not think there is one.

I apologise to my right hon. Friend for the fact that it has taken so long to answer his question about numbers. I am pleased and relieved that he has the information, which I hope is helpful. Other analysis is available, including that undertaken by the Institute for Fiscal Studies, to which reference has been made.

My right hon. Friend is particularly well informed about pensions, so he will recognise that one of the major reasons why the UK has such a complex pension system is that it contains so many transitional measures to maintain old arrangements phased out in the past. It would be a mistake to introduce similar arrangements in the tax system.

The elements of the personal tax package in the Budget were designed to ensure that, overall, low income groups were effectively protected, and the IFS analysis confirms that they have been. For example, a single-earner couple without children—to pick up on one of the points that was made earlier—on half median earnings receiving working tax credit will be £175 a year better off as a result of the Budget. That is right in the middle of the band that was mentioned. A lone parent, with one child, working full time at the minimum wage will be £335 a year better off. If we all agree—I think that on the whole we do—that it is right to prioritise the reduction and ultimately the eradication of child poverty, we need to prioritise households with children in Budget measures. That is what the package in the Budget does.

I hope that I have managed to persuade the House that it would not be right automatically to require transitional measures for any changes that left a particular group of taxpayers disadvantaged, however slightly—which is what the new clause would do. As far as I can see, where losses accrue to some as a result of the changes, they are small.

I am listening carefully to what the right hon. Gentleman is saying about transitional arrangements, but is he able to say whether the Treasury will undertake to publish information at the time of the Budget on the effect of the measures on individuals, as well as information on how their incomes may have changed over time? That would enable us to see clearly, in one place, the impact of Budget measures on different income groups.

Information has already been published. I point the hon. Lady to the IFS analysis for the sort of detail that she is asking for. That shows that the biggest proportionate gains from the package will be enjoyed by households in the lowest two income deciles. That is an important feature of the package.

I hope that I have persuaded the House that it would not be right to agree to the new clause. I understand the concerns expressed by my right hon. Friend the Member for Birkenhead and others across the House, but they are effectively addressed by the tax credit changes that are part of the package as well. I hope that he feels that it would not be right to press the new clause to a vote, but, if he does press it, I will certainly ask my hon. Friends not to support it.

I thank my right hon. Friend for those comments. The thrust of his remarks was that we have not put forward a workable scheme for transitional relief, but it was only seconds before I came into the Chamber that we got the crudest information on the numbers who would be gainers and the numbers—the 3 million—who would be losers, so it is a bit rich of him to say that we might have persuaded him had we come up with a workable scheme. For some reason or other, the information was not available. We could have looked at those data and come up with a workable scheme.

I want to make two comments: one to my side and one to the Opposition. What the Chief Secretary said was significant. He said that households in the lowest two deciles are the big gainers from the Budget. Since Lord Lawson introduced personal taxation, we have never been primarily concerned with household income; we have been concerned with individual income. On this side of the House, we were particularly keen on that, because we wished to see a transfer from wallet to purse wherever possible. If the Bill goes through as it stands, it will reverse the tradition that we started. It will move moneys from low-paid women’s purses into the wallets of higher-paid husbands. For that reason alone, people on this side of the House ought to be disturbed. I am sorry that there are not more women Members present to support that group in the debate and then in the Lobby.

Had it not been for the speech made by the hon. Member for Chipping Barnet (Mrs. Villiers), I would have said that my right hon. Friend the Chief Secretary took the biscuit. We were told by the official Opposition that while the new clause addressed a serious problem, they would not vote on the matter. The hon. Lady said that we could rely on the tax credit system to compensate people who will lose out—we do not know who they are, but we know that there will be 3 million of them. The official Opposition have rightly secured debates and asked questions on tax credits. This evening, the hon. Lady said that one in two payments were wrong. However, although the tax credit system works so badly, she thinks that the lowest paid of our tax-paying constituents will be protected.

The right hon. Gentleman must have misunderstood the point that I made. As I made clear in my speech, I strongly believe that the tax credit system will not solve all the problems produced by the Budget changes. However, a range of measures could be used to relieve hardship resulting from tax changes. We should not just phase in changes because there are other options to be considered.

There clearly are. People will draw their own conclusions from the contributions made in the debate.

I did not think that the answers given from the Treasury Bench were adequate. My right hon. Friend the Chief Secretary is probably the most gifted member of the Treasury team and he knows that his performance was below par. I hope that many hon. Members will join us in the Lobby.

Question put, That the clause be read a Second time:—

Clause 3

Small companies’ rates and fractions for financial year 2007

With this it will be convenient to discuss the following amendments: No. 41, page 2, line 11, leave out from ‘20%’ to end of line 12 and insert

‘for companies with non-ring fenced profits employing fewer than five people, and

(b) 19% for companies with either ring fence profits or five or more employees.’.

No. 42, page 2, line 14, leave out from second ‘profits’ to ‘fraction’ in line 17 and insert:

‘and companies employing fewer than five people and with non-ring fenced profits (“the smaller company fraction”), and

(b) 11/400ths in relation to ring-fence profits of companies and companies employing five or more people (“the standard’.

It is difficult to understate the mess into which the Government have got themselves on the taxation of small companies. After 11 Budgets and multiple rate changes, the Chancellor has almost come full circle on the subject. When the Government came to office, the rate was 23p in the pound. They reduced it to 21p in 1997 and to 20 per cent. in 1998. In 1999, a new 10 per cent. rate was introduced, reduced to zero in 2002, only to be put back up to 19 per cent. for non-corporate distributions in 2004. In this year’s Budget, the rate was increased from 19 to 20 per cent.; next year it will increase from 20p to 21p, and the following year, it will go up from 21p to 22p. By the next general election, the small companies rate will be only a penny less than it was in 1997. There have been so many changes, yet so little progress. Eight tax changes have been made, simply for the rate to fall by only 1p in the past 10 years.

That constant meddling in the small companies rate reflects a problem at the heart of the Government’s tax policy. Treasury Ministers perceive tax as a means of behavioural change; sometimes it might work and sometimes it does not. However, in 2002 some bright spark at the Treasury decided to stimulate enterprise by reducing the starting rate of corporation tax to zero. We know that that stimulated incorporation; hence the changes in later years to the starting rates, and their effects, until last year’s abolition.

In the debate in the Committee of the whole House, the hon. Member for Wolverhampton, South-West (Rob Marris) and I referred to proceedings on Second Reading of the Finance Act 2002. We both admitted that our memory was rather hazy, but I checked the debate and I found a quote, in which I thought that hon. Members might be interested. It is:

“As a result, many small unincorporated businesses, such as plumbers, small builders or shopkeepers, think that they should incorporate because the tax position has become so advantageous for them…The Federation of Small Businesses asked whether that was a deliberate policy of the Government. The Inland Revenue assured the federation that the policy was deliberate and was intended to encourage enterprise. However, I am at a loss to understand how incorporation in itself is an encouragement to enterprise. I should have thought that we should be encouraging small businesses to be set up according to whichever format suited them rather than directing them—as the goal of Government policy—towards incorporation.”—[Official Report, 30 April 2002; Vol. 384, c. 895.]

Even in 2002, some people identified the potential problem. Hon. Members may wish to know who made that speech; I must confess, with some modesty, that it was me. The Government were, therefore, warned about what might happen if the policy went ahead.

The Government, in trying to remove the incentives, have gone into overdrive by creating the position whereby by the next general election, the small companies rate of taxation will be 2p higher than the basic rate of tax. The measure’s impact on companies is crude. It is worth going back to the debate on this Bill in the Committee of the whole House, when the Financial Secretary said:

“In fact, a quarter of large companies—those employing more than 250 staff—pay the small companies or small profits rate; and fully around half of medium-sized companies, which have between 50 and 250 employees, pay that rate.”—[Official Report, 30 April 2007; Vol. 459, c. 1266.]

A measure that was apparently supposed to deal with unincorporated businesses becoming limited companies will lead to increases in the tax rate paid by 13,000 medium-sized companies and about 1,500 large companies.

In the spirit of consensus, may I offer to help the Government out of the hole they have got themselves into by increasing the tax rate on many businesses employing more than 50 staff? In amendments Nos. 41 and 42, they have an opportunity to focus the measure more effectively on the smallest companies, which they believe responded to their policy in 2002 to incorporate.

What is the Government’s justification for the measure? What are they using to defend that change of tax policy? The Budget note on corporation tax reform summarised the argument succinctly by setting out three main objectives of reform: enhancing the international competitiveness of UK-based business; encouraging growth through investment and innovation; and ensuring fairness across the tax system. Those are laudable objectives, but let us look more carefully at what they mean in practice for small business. The cut in mainstream corporation tax, which we support, aims to improve Britain’s international competitiveness, but only for companies earning profits of more than £300,000 a year. The Government’s attitude is, “If you earn profits lower than that, tough.” The Budget has worsened the position of such companies.

I suspect that the Financial Secretary will argue, as he did in the Committee of the whole House, that in the Budget there are changes to the annual investment allowance that will help small companies. However, that depends on businesses making decisions to invest in plant and machinery rather than in human capital. Small businesses that expected to earn the industrial buildings allowance or the agricultural buildings allowance will be hit hard by measures that we will discuss tomorrow.

The Government use the argument of fairness to justify the increase in the small companies tax rate, but I have established that it is a crude, clunking measure that hits companies of all sizes. There is a problem at the heart of the tax change, as the Government do not understand properly how small businesses work and how they are affected by the tax system. If they did, perhaps they would not be in this mess in the first place. It appears from representations made by small business groups that they do not believe that the Government understand them, either. Carol Undy of the Federation of Small Businesses was reported as saying:

“This is the Chancellor’s eleventh Budget and this year’s offering is no different to the others—he gives with one hand and takes with the other. Corporation tax was cut for large firms but increased for smaller ones.”

About the Chancellor’s tax changes, the federation said:

“tax cuts aimed at big business will do nothing to ease the burden for the majority of the private sector”.

The British Chambers of Commerce spoke out against the small companies corporation tax increase:

“Many of our members feel let down and are dismayed by the measures taken which will hit their competitiveness and increase their tax burden”.

Small business organisations clearly understand, as the Treasury does not, the impact of the increase on their members and their ability to invest and grow in future. The Government have sent mixed messages for business in the Budget, and it is time for a consistent approach to company taxation. Cutting one rate but increasing another sends a confused signal to the business world. It is right to encourage businesses to grow and invest, so it is wrong for the Chancellor, who did the right thing for companies earning large profits by cutting the headline rate of corporation tax, to increase the small companies rate. Because of the mistakes that he made in the past, he is penalising all small companies that pay that rate. Why should companies suffer because he got it wrong? The Government owe them an apology, not a tax increase.

I shall be brief. We have covered many of these issues on Second Reading, in the Committee of the whole House and in the Public Bill Committee. The only point that I wish to make, in addition to those made by the hon. Member for Fareham (Mr. Hoban), ties in with the previous debate.

It is not yet clear to many businesses how their tax treatment will be affected by the increase in the small business rate of corporation tax, the capital allowances and the research and development tax credits that may be available to them. Again, it would be helpful if, at the time of the Budget, information was published about what the differential impact of all the changes, in the round, will be—over time, as not all the changes occur within the same time frame; over sector, because we have heard that some capital-intensive businesses will benefit disproportionately; and by region, because in my part of the world, down in Cornwall and across the south-west, there are a disproportionate number of very small businesses. If many small businesses encounter a tax hike, areas with the highest proportion of small businesses will see that driver of their economy affected more negatively than other areas that have more big businesses or more capital-intensive businesses.

Businesses are still trying to work out how the changes will affect them, and what advantages and disadvantages there will be for them in the tax changes in the Budget and the Bill. I hope the Minister will give us an assurance that by the end of the debate on the Bill, businesses will have a clearer sense of what it will mean for them.

As the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said, we have covered much of the ground before, several times since the Budget, and we have rehearsed many of the general arguments in debates on the Bill and elsewhere. The arguments that I heard this evening from the hon. Member for Fareham (Mr. Hoban) are fundamentally flawed, first in the proposition that there should be a differential in how the small companies rate is charged, and secondly, in the way that he attempted to target those rates.

There are huge practical difficulties with attempting to fix a tax rate based on fairly arbitrary and easily manipulated criteria, such as employment figures. What is the rationale for choosing five employees as representing a real company, rather than, say, six or four? What if employment levels change throughout the year? Would a company wait until after it had filed its tax returns to cut the work force? Would it take on temporary workers in order to get above the magic level of five employees?

On a more serious level, one needs to consider the risk of distorting what should be commercial decisions because of a tax structure. That would create incentives for small companies to merge not for commercial reasons, but for tax reasons. It would also be an incentive to exaggerate employment levels in the company. The proposition is seriously flawed in a number of ways.

The core of the problem is not the practicality of introducing such arbitrary measures, but the rationale for doing so. To encourage investment, as the hon. Member for Fareham recognised, the Government have looked to reduce corporation tax rates successively since 1997, to the extent that even when we reverse that trend and return the small companies rate to 22 per cent., it will be still be lower than when we came into office in 1997. The hon. Gentleman acknowledged that earlier.

The hon. Gentleman criticised us for what he termed constant meddling with the rates, but at each stage what we have done, and the rationale for doing it, have been clearly set out. At each stage we have said that the changes that we are making in the rates were to encourage retention, reinvestment and growth. As with all elements of the tax system, we have made it clear that we would keep those changes under careful and constant review.

As hon. Members have recognised, the earlier changes and their impact were not as we intended. We saw an increase in incorporation taking place, not as a launch pad for growth but as a way of reducing personal tax and national insurance levels, while in many cases those involved were carrying out exactly the same economic activity as before.

That is why we decided to change the way in which we focus incentives for growth, and we have changed the focus, not for some businesses, or those with fewer than five employees, but for all businesses—not just companies, but those that are unincorporated as well. The hon. Member for Fareham cited the Federation of Small Businesses, and I shall do so too, as I have in previous debates. It has welcomed the proposal for the annual investment allowance, which will benefit the direct activity of investment. By providing an allowance of up to £50,000 for all businesses, the arrangement will cover all the yearly expenditure of about 19 out of 20 small businesses, effectively providing them with 100 per cent. first-year allowances, moving towards a cash-flow tax system, dealing with what many small businesses constantly say is their biggest problem—their tax-flow levels. Even modest levels of investment in plant and machinery will bring significant benefits.

We recognise that there are many sound reasons for incorporation. We do not want to stop or discourage genuine commercial incorporations. We are proud of our record in encouraging the start-up and growth of small firms, not least with the stability that we have been able to bring to the general economy. The changes that we are making in the Bill build on that success. They reduce the unfair tax advantages that can distort competition between incorporated and unincorporated businesses, and they ensure that the incentives in the tax system that are designed to promote growth will do just that.

For that reason, I hope that the hon. Member for Fareham will not press amendment No. 43. Amendments Nos. 41 and 42 go directly against what businesses say to us that they want—a simple and fair tax system—so I hope that he will not press those amendments, either. If he does, I shall ask my hon. Friends to resist.

This has been a brief debate, which is probably to the advantage of all hon. Members; as the Financial Secretary said, we have rehearsed these arguments before.

I accept that amendments Nos. 41 and 42 are quite crude amendments. In a sense, they mirror what the Government have sought to do by increasing the small companies rate, because the Government’s increase has been a very crude way of tackling a problem of their own making. Perhaps the Financial Secretary should take his own advice about measures that could end up distorting commercial decisions. Tax can distort commercial decisions, as the 2002 tax changes clearly did. He needs to reflect on that when considering future changes.

It is clear that, despite the package that the Financial Secretary described, as we established in the Committee of the whole House, the average gain for businesses from the introduction of the annual investment allowance is about £60 or £70 a business. The loss for small companies as a consequence of the increase in the tax rate is about £1,000 a company. I think that many small businesses and companies will find that a burden, and will find that they cannot invest as much as they would want to invest in developing their staff.

That sends out mixed and confused messages to companies that hear the Chancellor praising large companies and cutting their corporation tax, while small companies are penalised by this increase. That is why I wish to press amendment No. 43 to a vote—to send out a clear signal that at least on the Opposition Benches, we back small companies and want to see them grow.

Question put, That the amendment be made:—

Further consideration adjourned.—[Mr. Watts.]

To be further considered tomorrow.



That, notwithstanding the practice of the House as to the intervals between stages of Bills brought in upon Ways and Means Resolutions, more than one stage of the Finance Bill may be taken at any sitting of the House.—[Mr. Watts]


I propose to take motions 4 and 5 together.

Motion made, and Question put forthwith, pursuant to Standing Order No. 118(6) (Delegated Legislation Committees),

Trade Marks

That the draft Trade Marks (Relative Grounds) Order 2007, which was laid before this House on 8th May, be approved.

Public Health

That the draft Vaccine Damage Payments Act 1979 Statutory Sum Order 2007, which was laid before this House on 16th May, be approved.—[ Mr. Watts.]

Question agreed to.


Motion made, and Question put forthwith, pursuant to Standing Order No. 18(1)(a) (Consideration of draft regulatory reform orders)


That the draft Regulatory Reform (Game) Order 2007, which was laid before this House on 4th June, be approved.— [Mr. Watts.]

Question agreed to.


Motion made, and Question put forthwith, pursuant to Standing Order No. 119(9) (European Standing Committees),

European Research Area

That this House takes note of European Union Document No. 8322/07, Commission Green Paper, The European Research Area: New Perspectives; encourages UK stakeholders to participate in the consultation process which the Commission has inaugurated; and agrees that the issues identified in the document are of vital importance to ensuring the effective development of the European Research Area.—[ Mr. Watts.]

Question agreed to.