Finance (No. 2) Bill

Bill not amended in the Committee and as amended in the Standing Committee, considered.

Ordered,

That the Finance (No.2) Bill, as amended, be considered in the following order, namely, new Clauses relating to Part 6, new Schedules relating to Part 6, amendments relating to Clauses 155 and 156, Schedule 20, Clause 157, remaining new Clauses, remaining new Schedules, amendments relating to Clauses 1 to 27, Schedule 1, Clause 28, Schedule 2, Clause 29, Schedule 3, Clauses 30 to 37, Schedule 4, Clauses 38 to 42, Schedule 5, Clauses 43 to 76, Schedule 6, Clauses 77 to 79, Schedule 7, Clauses 80 and 81, Schedules 8 and 9, Clause 82, Schedule 10, Clauses 83 to 86, Schedule 11, Clauses 87 and 88, Schedule 12, Clause 89, Schedule 13, Clauses 90 and 91, Schedule 14, Clauses 92 to 102, Schedule 15, Clauses 103 and 104, Schedule 16, Clause 105 to 134, Schedule 17, Clauses 135 to 146, Schedule 18, Clauses 147 to 154, Schedule 19, Clause 158, Schedule 21, Clauses 159 and 160, Schedule 22, Clause 161, Schedule 23, Clauses162 and 163, Schedule 24, Clause 164, Schedule 25, Clauses 165 to 178, Schedule 26, and Clauses 179 and180—[Dawn Primarolo.]

New Clause 2

Trusts relating to divorce, life protection policies and disabled persons

‘The provisions of Schedule 20 shall not operate so as to discourage, impede or prevent the use of trusts which are set up—

(a) as a result of relationship breakdown and create a “relationship breakdown settlement interest”, as defined in section 59A of the Inheritance Tax Act 1984; or

(b) in relation to the proceeds of life protection policies, as defined in section 58(4) of the Inheritance Tax Act 1984; or

(c) by or in favour of disabled persons within the definition set out in section 89 of the Inheritance Tax Act 1984.’.—[Mrs. Villiers.]

Brought up, and read the First time.

15:48:00

Mrs. Theresa Villiers (Chipping Barnet) (Con)
I beg to move, That the clause be read a Second time.

Mr. Speaker
With this it will be convenient to discuss the following:

Amendment No. 58, in schedule 20, page 377, line 21,  after ‘minor’, insert ‘(whether by exercise of trustees’ powers under such a will or otherwise).’.

Amendment No. 56, page 380, line 30, at end insert—

‘(4A) Where—

(a) section 71 above applied to settled property immediately before 22nd March 2006,

(b) on or after that date a beneficiary (within the meaning of section 71 above) (“B”) became entitled to an interest in possession in that settled property, and

(c) before that interest in possession had come to an end and while B was under the age of 25 and before [6th April 2008] that settled property became held for the benefit of B on trusts such as are mentioned in subsection (3)(b)(i) above,

subsections (3) and (4) above shall apply as though the settled property had become held on the trusts referred to in paragraph (c) above immediately at the time B in fact became entitled to the interest in possession referred to in paragraph (b) above.’.

Government amendment No. 70.

Amendment No. 34, page 386, line 3, after ‘interest’, insert ‘, or

(d) a relationship breakdown settlement interest.’.

Government amendments Nos. 71 to 74.

Amendment No. 59, page 386, line 42, after ‘but’, insert ‘(unless B was the spouse or civil partner of the person entitled to the prior interest)’.

Government amendments Nos. 75 to 77.

Amendment No. 5, page 388, line 18, at beginning insert—

‘6 (1) In section 89 (trusts for disabled persons)—

(a) in subsection (4)(a) at end insert—

“(aa) a person who lacked capacity within the meaning of section 272 below, or”;

(b) in subsection (4)(c), leave out “or middle” and insert “middle or lower”; and

(c) after subsection (4)(c) at end insert—

“(d) a person who satisfies the Commissioners for Her Majesty’s Revenue and Customs that he had a condition that it was at that time reasonable to expect would have such effects on him as to lead to him becoming a person—

(i) falling within subsection (4)(a) or (aa) above, or

(ii) in receipt of an attendance allowance mentioned in subsection (4)(b) above, or

(iii) in receipt of a disability living allowance mentioned in subsection (4)(c) above.”.’.

Amendment No. 6, page 388, line 29, after ‘89(4)(a)’, insert ‘or (aa)’.

Amendment No. 7, page 388, line 34 , leave out ‘or middle’ and insert ‘, middle or lower’.

Government amendment No. 78.

Amendment No. 8, page 390, line 26, leave out ‘or middle’ and insert ‘, middle or lower’.

Amendment No. 9, page 390, line 46, leave out ‘or middle’ and insert ‘, middle or lower’.

Amendment No. 10, page 391, line 2, at end insert—

‘(7) The reference in subsection (1) above to a disabled person includes, in relation to any settled property, a reference to a person who satisfied Her Majesty’s Revenue and Customs that he would, when the property was transferred into settlement, have been entitled to an attendance allowance or disability living allowance, by virtue of entitlement to the care component at the highest, middle or lower rate, whether or not such an allowance was actually claimed.’.

Government amendment No. 79.

Amendment No. 35, page 393, line 9, at end insert ‘, and

(iv) not a relationship breakdown settlement interest.”’.

Amendment No. 32, page 393, line 9, after ‘interest’, insert—

‘10A (1) Section 10 of IHTA 1984 is amended as follows.

(2) In subsection (1)(b) after “with each other”, insert “, or

(c) it is made in accordance with or pursuant to a court order in proceedings for the following types of provision—

(i) financial relief for the parties to a marriage and any children of the family in connection with proceedings for divorce, nullity of marriage or judicial separation including, but not limited to, property adjustment orders or variation of settlement orders under section 24 of the Matrimonial Causes Act 1973 or orders under section 8 of the Family Law (Scotland) Act 1985 and any successive legislation; or

(ii) financial relief for the parties of a civil partnership in connection with proceedings for dissolution of the civil partnership including, but not limited to, property adjustment orders or variation of settlement orders under Schedule 5 of the Civil Partnership Act 2004 and any successive legislation; or

(iii) where a marriage has been dissolved or annulled or the parties to a marriage have been legally separated, by means of judicial or other proceedings in an overseas country and the divorce, annulment or legal separation is entitled to be recognised as valid in England and Wales, in Scotland or in Northern Ireland, financial relief for the parties to the marriage and any children of the family including, but not limited to, property adjustment orders or variation of settlement orders under section 17 of the Matrimonial and Family Proceedings Act 1984 or orders under section 8 of the Family Law (Scotland) Act 1985 and any successive legislation; or

(iv) financial relief for the benefit of a child including, but not limited to, a transfer or settlement of property under paragraph 1 of Schedule 1 of the Children Act 1989 and any successive legislation.”.’.

Government amendment No. 80.

Amendment No. 36, page 396, line 15, at end insert ‘, or

(c) a relationship breakdown settlement interest.”’.

Amendment No. 37, page 396, line 30, at end insert ‘, or

(d) a relationship breakdown settlement interest.”’.

Amendment No. 38, page 396, line 39, at end insert ‘, or

(d) a relationship breakdown settlement interest.”’.

Amendment No. 39, page 397, line 24, at end insert ‘, or

(c) a relationship breakdown settlement interest.”’.

Amendment No. 40, page 398, line 10, at end insert ‘, or

(c) a relationship breakdown settlement interest.”’.

Amendment No. 41, page 398, line 28, at end insert ‘, or

(d) a relationship breakdown settlement interest.”’.

Amendment No. 3, page 398, line 39, at end insert—

‘(2A) After sub-paragraph 1(f) insert—

“(g) a life protection policy as defined in subsection 4 below;

(h) property representing directly or indirectly any sum paid under a life protection policy, within two years following the death of any person giving rise to that sum.”.’.

Amendment No. 42, page 399, line 11, at end insert ‘, and

(iv) not a relationship breakdown settlement interest.’.

Amendment No. 4, page 399, line 25, at end insert—

‘(4) After section 58(3) insert—

“58(4) In subsections 1(g) and 1(h) above a “life protection policy” is a policy of insurance where the sum payable on the death or disability of any person is at all times no less than a number of equal to ten multiplied by the highest total sum of premiums paid in any period of twelve months.”.’.

Amendment No. 43, page 399, line 37, after first ‘interest’, insert ‘, or a relationship breakdown settlement interest’.

Government amendment No. 81.

Amendment No. 33, page 400, line 6, at end insert—

‘20A In IHTA 1984 after section 59 IHTA 1984 insert—

“59A Relationship breakdown settlement interest

(1) Where a person (“L”) is beneficially entitled to an interest in possession in settled property, for the purposes of this Chapter that interest is a “relationship breakdown settlement interest” only if the following conditions are satisfied.

(2) Condition 1 is that the settlement was effected, or if there was a prior settlement it was confirmed or varied, by a court order, in proceedings of the type mentioned in section 10(1)(c).

(3) Condition 2 is that L became beneficially entitled to the interest in possession on or before the date on which the court order came into effect.’.

Government amendment No. 82.

Amendment No. 57, page 400, line 44, at end insert ‘or a disabled person’s interest’.

Government amendment No. 83.

Amendment No. 44, page 401, line 21 , after ‘interest’, insert ‘, or

(iii) a relationship breakdown settlement interest.’.

Government amendment No. 84.

Amendment No. 45, page 401, line 27, after second ‘interest’, insert ‘or a relationship breakdown settlement interest’.

Government amendment No. 85.

Amendment No. 46, page 401, line 30 , after ‘interest’, insert ‘or a relationship breakdown settlement interest’.

Government amendment No. 86.

Amendment No. 47, page 401, line 37 , leave out ‘neither’ and insert ‘not’.

Government amendment No. 87.

Amendment No. 48, page 401, line 37, leave out ‘nor’ and insert ‘or’.

Amendment No. 49, page 401, line 38 , after ‘interest’, insert ‘or a relationship breakdown settlement interest.’.

Amendment No. 50, page 402, line 2, at end insert ‘, or

(d) a relationship breakdown settlement interest.”’.

Amendment No. 54, page 403, leave out line 1.

Amendment No. 55, page 403, line 2 , leave out ‘the’ and insert ‘a’.

Government amendments Nos. 88 and 89.

Amendment No. 11, page 403, line 26, at end insert—

‘“lacked capacity” means lacked capacity, within the meaning of the Mental Capacity Act 2005, in relation to any financial matter;’.

Amendment No. 51, page 403, line 26, at end insert—

‘“relationship breakdown settlement interest” means a relationship breakdown settlement interest for the purposes of Chapter 3 of Part 3 (see section 59A above);”’.

Government amendments Nos. 90 to 92.

Amendment No. 12, page 404, line 6, at end insert—

‘(iii) a disabled person’s interest, within the meaning given by section 89B of that Act; or’.

Amendment No. 52, page 404, line 6, at end insert—

‘(iii) a relationship breakdown settlement interest within the meaning given by section 59A of that Act, or’.

Government amendments Nos. 93 to 96.

Amendment No. 53, page 405, line 5, after ‘interest’, insert ‘or

(iii) a relationship breakdown settlement interest.’.

Mrs. Villiers
From the day the Chancellor slipped out these proposals contained in schedule 20 of the Finance Bill in Budget note 25 on 22 March this year, they were greeted with dismay and viewed as a matter of grave concern. Protests came from thousands of professionals across the country who were deeply worried that the Government had failed to carry out any consultation on the proposals and that those proposals would have a retrospective impact on thousands of trusts. Above all, Richard Platt, of Brewin Dolphin Securities, spoke for many of similar mind when he said that the proposals would

“hit Britain’s hard-working families at a time when the Government is encouraging families to safeguard their long-term financial security.”

The Society of Trust and Estate Practitioners, which has campaigned hard on the issue, estimated that at least 1 million wills would have to be reviewed or rewritten. The VAT on the £250 million or so of professional fees incurred in reviewing all those wills would have outstripped the mere £15 million that the Government expected to raise from what must have been one of the least cost-effective tax proposals ever made.

The Paymaster General dismissed the measured concerns that I expressed about these matters on the Floor of the House by saying that I did not know what I was talking about. Despite that robust defence, in Committee the Government then proceeded to table no fewer than 33 amendments to schedule 20 in an attempt to mitigate the serious problems about which I and so many others had protested.

The key changes were to reduce the new tax penalty imposed on trusts where property does not vest until the age of 25, and to restore the spouse exemption for trusts set up in wills. The Chancellor’s retreat continues today, with another 27 Government amendments to schedule 20. I welcome Government amendment No. 75 in particular, which more or less completes the Government’s U-turn on the spouse exemption and covers the point made in our amendment No. 59. The Government dismissed my arguments on the point in Committee, but they seem now to have conceded that successive life interest for spouses should not always fall under the new regime set out in schedule 20.

John Bercow (Buckingham) (Con)
Will my hon. Friend give way?

Mrs. Villiers
Certainly.

John Bercow
I am very grateful to my hon. Friend, and I look forward to supporting the amendments and new clauses that she and my other hon. Friends on the Front Bench have rightly tabled. At the outset of her remarks, she said that the Chancellor had “slipped out” these proposals. It may be that the right hon. Gentleman expatiated eloquently and at length on these matters in his Budget speech, but I do not recall him doing so. Will my hon. Friend refresh my memory as to the correct chronology of events?

Mrs. Villiers
My hon. Friend is correct. The Chancellor did not choose to refer in his Budget speech to these radical proposals, which have been called the most significant changes to inheritance tax for a generation.

I also welcome Government amendment No. 89, which effectively puts into effect our amendments Nos. 54 and 55 and removes serious technical obstacles that would have prevented trustees from making appointments under trusts set up in discretionary wills. I am grateful for the sympathetic approach to the matter adopted by the Paymaster General in Committee, which has been confirmed in the Government amendment. However, some very serious problems in respect of schedule 20, and the Chancellor’s proposed new inheritance tax charges on trusts, remain unsolved.

New clause 2 and the other Opposition amendments in the group focus on four main areas: technical issues relating to trusts for young people; disability; life insurance, and trusts arising from relationship breakdown.

First, amendment No. 56 would correct an anomaly in proposed new section 71D, which was introduced in Committee and which reduces the harsh impact of schedule 20 in relation to existing accumulation and maintenance trusts. The proposed new section introduces a new taxation scheme allowing trustees to opt into a regime under which inheritance tax at 4.2 per cent. is paid if a vesting age of 25 is retained. However, if a beneficiary under such a trust has obtained an interest in possession since Budget day, it seems that the new taxation rating cannot apply because the trust entered the relevant property regime before steps could be taken to comply with proposed new section 71D. Thus, there is no opportunity to convert into a form of trust that would satisfy the new rules.

If the Paymaster General will not accept our amendments, I hope that she will at least clarify the matter. In Committee, she maintained that proposed new section 71D had been tabled merely to clarify what had always been the Government’s intention. If that is so, it seems very unfair to penalise people who are victims of the Government’s admitted failure to make their intentions clear on publication of the Bill.

Amendment No. 58 is also technical in nature, but would make an important change to provisions in respect of the bereaved minor trust. That is an important part of the Government’s new framework, and the amendment deals with the circumstances that arise when a will leaves property on trust to a spouse for life, with the remainder going to children on trust, vesting when they reach 25. That arrangement will attract the full force of the new schedule 20 charges, unless it can be varied to comply with the requirements of proposed new sections 71A and 71D. Trustees may wish to do that, but proposed new section 71A(2)(a) means that a change made by trustees will not enable them to opt into the bereaved minor trust regime. That is because such trusts apparently can arise only under a will and, in the circumstances that I have outlined, the trusts arise as a result of the exercise of the trustees’ powers—that is, not directly under the will.

Amendment No. 58 would ensure that a change by trustees in that situation will suffice to bring the trust under the proposed new section 71A regime. If it is not adopted, many thousands of wills, perhaps more, will still need to be reviewed. I hope that, at the very least, the Paymaster General will give the House clarification on that point.

Turning to the more substantive issues, rather than the technical one, our amendments would broaden the definition of disability in section 89 of the Inheritance Tax Act 1984. Section 89 has received little attention up to now, because plenty of more useful and more flexible trusts could be set up for vulnerable people outside the scope of section 89. Now that the majority of such trusts will be hit by the new inheritance tax charges under schedule 20, the section 89 carve-out has suddenly grown significantly in importance.

Some problems in respect of trusts for disabled people have been solved by amendments tabled by the Government in Committee and the retreat continues with their amendment No. 92, which will be considered this afternoon and is to all intents and purposes identical to Opposition amendment No. 12. As drafted, the Bill would impose a double tax hit on the death of a disabled beneficiary under an interest in possession trust. Both inheritance tax and capital gains tax would be payable, which would leave disabled beneficiaries facing a higher tax bill than they would have done before Budget day. I am relieved that the Government have had second thoughts about imposing that extra tax hit on vulnerable people, despite the Paymaster General’s rejection of my amendment on that matter in Committee.

Similarly, I welcome the Government’s acceptance of the point made in Opposition amendment No. 52—that it would be unacceptable to leave a disabled beneficiary struggling with the administrative problems caused by the related settlement regime of IHTA section 80 when others are exempted. Unless the Bill is amended on that point, people setting up trusts for a disabled spouse will be in a more disadvantaged position than those leaving a life-interest trust in their will to a non-disabled spouse.

Even with the solution of those problems, however, significant difficulties will still arise in relation to the impact of schedule 20 on trusts for vulnerable and disabled people—some of the most disadvantaged communities in our society. Robin Williamson of the Low Incomes Tax Reform Group put it more articulately than I possibly could. He said:

“On Budget day…this year…the Government proposed—without prior consultation—the most far-reaching changes to inheritance tax in a generation. Their intention seems to be to exclude trusts for disabled people from the scope of the new tax charges to be levied on most other types of trust. But the definition of disabled person used for this purpose, substantially unaltered for more than 20 years, is so narrowly framed as to leave many disabled beneficiaries of trusts out in the cold.

While the rest of government forges ahead in its understanding of disability issues, with the Disability Discrimination Acts 1995 and 2005 ushering in a new age of inclusion, the tax system clings obstinately to ancient precedents. The final opportunity to put these matters right comes when the Finance Bill receives its third reading on Tuesday and Wednesday 4 and 5 July. We urge the Government to reconsider, otherwise this once-in-a-generation opportunity to bring the tax definition of disabled person up-to-date and into line with the rest of Government thinking on disability will have been missed.”

John Bercow
So that the issue is fully intelligible to those of us who were not privileged to sit on the Standing Committee, and to others outside this place who are very interested in this point, will my hon. Friend explain precisely what is the rather narrow definition that the Government have hitherto insisted on using?

Mrs. Villiers
Yes, I shall explore that point in a moment.

In a joint statement, the organisations Mind, the Society of Trust and Estate Practitioners, the Parkinson’s Disease Society, the Chartered Institute of Taxation, the Institute of Chartered Accountants, the Law Society, the Low Incomes Tax Reform Group and the National Autistic Society said:

“We are not seeking favoured treatment, but to prevent vulnerable trust beneficiaries from incurring a tax penalty that they would not have incurred before Budget day. There are so many inconsistencies in the definition in section 89 that we firmly take the view that the legislation cannot go forward as currently drafted without causing severe prejudice to the interests of vulnerable trust beneficiaries, and discrimination between different classes of beneficiary, some of whom may qualify as a “disabled person” under the definition and some of whom will not.”

Turning to the point made by my hon. Friend the Member for Buckingham (John Bercow), the current section 89 definition covers two groups: people who, by reason of mental disorder within the meaning of the Mental Health Act 1983, are incapable of administering their property or managing their own affairs and people who are claiming attendance allowance or the highest or middle rate care component of disability living allowance.

16:00:00

The Opposition seek to broaden both categories of the definition. In accordance with the representations made by Mind and other concerned groups, we propose to add a reference to the Mental Capacity Act 2005, so that it is sufficient if the beneficiary falls within the definition of incapacity contained in the Mental Health Act 1983 or the 2005 Act.

The problem that we seek to address with the new clause and these amendments was highlighted by James Kessler, QC, when he said:

“The definition of disabled is extremely narrow…the large majority of mentally vulnerable people will not be included. No relief is given for those with partial mental capacity… No relief is available to those who are aged or infirm or incapacitated whose disability is less than the grievous state required for relief.”

Sir Nicholas Winterton (Macclesfield) (Con)
I seek to broaden the debate very slightly. I fully agree with the argument being advanced by my hon. Friend from the shadow Treasury team, but is it not utterly wrong that there should be prejudice in the Government against the cascading down of wealth from one generation to the next, particularly against those who are seeking to hand on by way of a trust to those who are disabled, either physically or mentally, or to those who have looked after their elderly parents, thus sacrificing their own career? Their future is prejudiced because of the measure that the Government want to introduce—that is, it is unfair. Does my hon. Friend agree?

Mrs. Villiers
It is certainly enormously important that parents who wish to provide for a disabled child for the rest of their child’s life are not prevented or inhibited from or penalised for setting up a trust for that purpose. It seems to be the most worthwhile thing in the world for people to want to provide security for their disabled children. That is what the Opposition seek to do in our new clause and amendments this afternoon.

The Paymaster General (Dawn Primarolo)
Perhaps the hon. Lady would explain to the hon. Member for Macclesfield (Sir Nicholas Winterton) that the Government carried out a consultation exercise on this very issue two years ago and that, overwhelmingly, all the organisations consulted said that they want to stick with the provisions of the Mental Health Act 1983. Would she also explain to the hon. Gentleman that we are talking about inheritance tax avoidance, not about planning for disabled children?

Mrs. Villiers
On the second point, the Paymaster General and the Government repeatedly say that schedule 20 is all about preventing the super-rich from sheltering their wealth from inheritance tax, but they adduce no evidence that trusts are used in that way. It is almost impossible to see how trusts can be used in that way, because they are taxed in the same way as an outright gift. The reality is that schedule 20 will hit a vast number of arrangements that have nothing at all to do with taxation. The fact that someone might wish to save their money and put it into a trust to provide after their death for their disabled child seems to have nothing whatsoever to do with inheritance tax.

I am glad that the Paymaster General referred to the consultation that the Government carried out, but she failed to mention that the consultation on the definition is two years old.

Dawn Primarolo
I just said that.

Mrs. Villiers
I am sorry—a slight omission—but certainly no mention was made of the fact that the consultation was carried out in the context of an income tax provision, which did not have nearly the same significance as section 89. Furthermore, again, I quote the QC to whom I referred earlier:

“Until now the tax reliefs for disabled persons have been almost entirely irrelevant because the value and importance of the reliefs have been trivial. The reliefs have not been significantly used because they are more trouble than they are worth. Thus it does not matter that the definition of disabled has been drawn extremely narrowly.”

Even more importantly, the Mental Capacity Act 2005 had not been finalised when the consultation was carried out, so it would have been difficult for the organisations to refer to such matters directly. Although a significant number of charitable organisations were involved in the consultation, only six responded on that issue during the two consultation exercises that were carried out.

A number of influential organisations protested that the definition was too narrow. On this point, the Treasury summary of the responses states:

“There was concern that the definition of vulnerable set out in the discussion papers—which covered disabled people and orphaned children—was too narrow.”

In Committee, the Paymaster General referred to the Disability Alliance as supporting the current section 89 definition. I would therefore like to quote from its response on the consultation, which it publishes on its website. Under the heading “Defining categories of disabled people”, it states:

“The proposals to restrict eligibility to those mentioned in paragraph 2 above appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government’s proposal of fairness.”

I was only too happy to take up the Minister’s invitation to refer to the consultation.

Mr. Philip Dunne (Ludlow) (Con)
The Paymaster General quite rightly points out that the consultation began more than two years ago, but she has failed to acknowledge that no mention was made during that consultation of the main issue before us in relation to the changes in schedule 20—the reduction in age from 25 to 18 for accumulation and maintenance trusts. That was not referred to in the consultation at all. Nor was any evidence given by the Paymaster General in Committee of any systematic abuse. The consultation exercise failed to reveal the issues that the Government are now trying to introduce.

Mrs. Villiers
I agree that it was deeply unfortunate that the Government carried out the two-year consultation and never once mentioned the proposals on inheritance tax that they were seeking to put forward.

Rob Marris (Wolverhampton, South-West) (Lab)
Will the hon. Lady indicate whether her amendments are aimed at dealing with trusts for people with disabilities set up inter vivos or on death? Those things are very different in terms of whether one is making provision for a child with a disability. Amendment No. 7 seeks to include the lower rate of disability living allowance as a kind of qualifying gateway. What level of disability is encompassed by the lower rate of DLA definition? Will she give some examples?

Mrs. Villiers
I will come to the second point later. On the first point, the amendments are most important in relation to inter vivos trusts, because at least there are other options open in relation to trusts set up on death. After the Government’s amendments in Committee, it will now be possible to set up life-interest trusts under a will without suffering the tax penalties. The primary advantage to be gained by the Opposition’s amendments is in relation to the establishment of inter vivos trusts, which would obviously otherwise incur the charges.

Rob Marris
I am grateful for that clarification. Perhaps I have misunderstood the hon. Lady, and she can clarify things if I have, but the reply that the Opposition amendments are related to inter vivos trusts suggests that we are talking about a tax dodge, rather than the laudable aim of a parent of a child with a disability—who will have that disability for life and who is likely to outlive their parents—who wants to make provision for that child after the parent is gone. I can see the situation with trusts on death, but the hon. Lady is talking about amendments relating to inter vivos trusts. I hope that she will realise why there appears—certainly prima facie—to be a tax dodge in that scenario.

Mrs. Villiers
I know that the hon. Gentleman is keen to crack down on tax avoidance, but it is harsh to accuse parents who set up trusts to provide for their disabled children of doing that for motives of tax dodging. Let us take, for example, a situation in which the parents of a disabled child are becoming elderly. They may find it difficult to continue to manage the financial affairs as their own capacity starts to diminish. It is an entirely understandable wish on the part of a parent to get things sorted out, set up and finalised well before they die. There is a real social need to sort out and secure the future of one’s children, even before one’s death.

The definition in the 2005 Act is much broader than in the 1983 Act and will more easily cover the people with partial, variable and fluctuating levels of capacity to which I referred earlier in the quote from James Kessler, QC.

Moreover, the definition in the 2005 Act is more up to date—many of the relevant provisions of the 1983 Act are soon to be repealed. That Act is geared towards determining whether compulsory treatment is required. The background to its operation is the question whether someone is a risk to themselves or others—that is, whether they should be sectioned. In contrast, the 2005 Act focuses on whether someone has the capacity to manage their own affairs and considers their ability to make decisions about their own lives. It is much more empowering. It focuses more closely on the situation that we are considering, whereby a disabled person may wish to use a trust to assist them in managing their property. Our amendment is focused specifically on capacity in relation to financial matters.

The key problem is that many people who need trusts to help them to tackle the serious difficulty that they may have in managing their finances fall short of the degree of mental illness required to bring them within in the definition in the 1983 Act. For example, many people who have a diagnosis of manic depression or schizophrenia will not be ill enough to fall within that definition, yet they may be the very people who need trusts most of all. As the charity, Rethink, points out on its website, people with manic conditions often believe that they are richer than they are and go on irrational spending sprees. One family wrote to me about the trust that it had set up for their daughter, whose bipolar disorder, more commonly known as manic depression, leads to such irrational spending. They said:

“We are not wealthy and we imagine our assets are probably about average or less for families that live in this part”—

of the country.

“We know that other parents in Scotland of modest means whose children suffer manic depression or problems such as drug addiction, alcoholism etc. have also set up IIP trusts. We need flexibility from limited funds to care for the surviving spouse as well as for a mentally sick (but not disabled) offspring. We write to ask you to seek to influence the legislation. We are concerned that trusts that have no tax avoidance intention or action will suffer unfairly large taxation…Our sole intention is to provide trustees to regulate my daughter’s income so that she does not make herself destitute by claiming her legal share of assets if they are not protected by an existing IIP trust.”

I hardly think that people in that position can be accused of engaging in a tax dodge, as the hon. Member for Wolverhampton, South-West (Rob Marris) suggested. Unless amended, the Bill will impose a 20 per cent. tax charge on capital plus a 6 per cent. tax charge every 10 years on a trust of this nature set up for a vulnerable person. The definition in the 2005 Act was subject to 12 years of consultation. It has a wide range of support among groups working with people with mental health difficulties, and I appeal to the Government to accept its incorporation into the Bill.

Turning to the second limb of the section 89 definition, the Low Incomes Tax Reform Group and its influential coalition point out that the benefits-related test is a very blunt instrument. In many cases, people with serious disabilities will not qualify for the middle or highest rate care components of disability living allowance as required by section 89. To qualify even for the middle rate—here I respond to the intervention by the hon. Member for Wolverhampton, South-West—someone must be so severely disabled that they require frequent attention or continual supervision throughout the day or night. In particular, the provision excludes beneficiaries under trusts set up for personal injury damages or to cover money from disaster funds, who may have a high mobility component and a lower care component of DLA—in other words, they may need an hour’s care a day or more but not frequent or continuous care. Surely such cases, where for example personal injury damages have been obtained, are exactly the type of situation in which a trust can be most useful, in that a large cash sum is received that has to be managed carefully to provide for the rest of the beneficiary’s life. Again, the Government want to slap a 20 per cent. up-front charge on those damages and a 6 per cent. charge on capital every 10 years. As the Society of Trust and Estate Practitioners points out, such people can ill afford to pay those new charges since the quantum of damages awarded to them has been carefully assessed to meet their needs for the rest of their life.

We should remember that the sums involved in such damages settlements and court cases are likely to be very significant. As they are intended to cover the rest of the claimant’s life, with the high cost of living with disability factored in, they may well exceed the inheritance tax thresholds. The Opposition have tabled cautious amendments to extend the scope of section 89 as regards those who can claim the lower rate of the care component. That would embrace many more disabled people. We urge the Government to accept those amendments in order to seize this last opportunity to prevent schedule 20 from penalising some of the most vulnerable and disadvantaged people in our community.

16:15:00

Rob Marris
I declare an interest, in that I used to work for Thompson’s personal injury solicitors, who give money to my constituency Labour party. I point out to the hon. Lady that under her amendments some personal injury victims would get a windfall. When their awards were calculated the then tax regime would have been taken into account, and if she then ameliorated the tax regime, those individuals would get a windfall. Secondly, the Government are, rightly, encouraging PI victims with large settlements to take them as a series of staged payments, to put it in the vernacular, rather than in one large lump sum.

Mrs. Villiers
The point is that the courts have not taken the new tax regime into account. The changes will impact on existing trusts, so, far from a windfall, there will be a tax penalty. Even if the courts had been sharp enough to say, “We will look at what is in the Finance Bill and start tailoring compensation awards accordingly,” how are they supposed to know how the legislation will turn out? Only two days ago, the Government were still tabling amendments. They have tabled 50 amendments to schedule 20. It is completely impossible for any court in a PI case to have tailored its settlement to take into account the current tax regime because, quite frankly, no one knows what it is. The hon. Gentleman may shake his head, but he knows that that is a valid point. [Interruption.] Indeed, the Government have been making it up as they go along.

That brings me neatly to insurance, and a prime example of how the Government have been making it up as they go along. It has been a problem for them ever since they slipped out Budget note 25. They simply did not think through the impact of schedule 20 on millions of people who hold life insurance policies in trust. Writing insurance policies into trust has been considered best practice for many years because it means that money can be paid out to the family swiftly in the event of tragedy, without lengthy delays waiting for a grant of probate. It also means that it is simple and easy to change the beneficiaries under a policy to take account of changing family circumstances.

Data from the Association of British Insurers suggest that there are 22.5 million single premium and regular premium life policies in force, and anecdotal evidence indicates that about 20 per cent. are written in trust. The ABI estimated that about 4.5 million policies may have to be reviewed as a result of schedule 20. The families affected would be faced, at worst, with the threat of a punitive new tax bill, and at best with the need to review and amend their policies. Prudential and Standard Life both suspended the sale of life policies under trust because of the uncertainty surrounding the Finance Bill.

Initially, the Government’s reaction was denial. They denied that there was a problem. They issued a guidance note and dismissed the furore as scaremongering. However, following the Bill’s publication, it was clear that there was no specific exclusion for life policies. Kevin Martin, the Law Society president, confirmed that millions of life policies would still be caught. Julie Hutchinson of Standard Life expressed the concerns of many when she said:

“We’re extremely disappointed that the clear statements in the guidance note are not carried into effect in the bill itself and will be making further representations via the ABI on this retrospective effect issue”.

The concerns that I set out on Second Reading were brushed aside, then a few weeks later, in Committee, the Government suddenly tabled a set of deeply obscure and complex amendments. Although I welcome the Government’s change of heart on that, as on so many other aspects of schedule 20, a number of serious problems remain. As Colin Jelly of Skandia Life pointed out, the Government’s amendments in Committee were only a small, albeit a welcome, step in the right direction. He said:

“A significant number of people are still likely to be affected by the changes and the government is doing nothing more than tinkering at the edges of the proposed legislation.”

The carve-out introduced by the Government in Committee does not cover all pre-Budget day policies. It therefore contravenes the Treasury’s guidance note of 7 April and the statement made to the House by the then Chief Secretary on Second Reading that

“no one who wrote a life insurance policy in trust before Budget day will have to pay a new inheritance tax charge as a result of these changes.”—[Official Report, 24 April 2006; Vol. 445, c. 369.]

This statement is still not true. The new charges will still apply to pre-Budget day policies where there is a change of beneficiaries, except where that change results from death. If, for example, a new baby is added to a policy, that will amount to a new settlement and will trigger the new penal schedule 20 regime. Furthermore, where an interest in possession is removed from someone who remains a beneficiary, the new reservation of benefit rules in paragraph 33 of the schedule mean that the trust could be liable for a 40 per cent. inheritance tax charge on the death of the former life tenant.

Because of those gaps in the protection provided by the Government amendments that were made in Committee, substantial numbers of people—perhaps millions—will have to review their policies. Even more worryingly, the Government’s climbdown in Committee does nothing to assist life insurance policies written into trust after Budget day, all of which will be subject to the new regime and charges. Having originally thought that no policies would be affected at all, the Government appear to be happy that some policies will be caught by the new charges from now on. Almost by accident, they have proposed to introduce significant new taxes on life insurance policies that will operate in an arbitrary way when the 6 per cent. charge is levied on the 10-year anniversary of the trust.

Sir Nicholas Winterton
Why does my hon. Friend think that the Government are against saving, which is for the benefit not only of an individual family but of the country? The measures appear to accuse people of avoiding inheritance tax—I personally believe that inheritance tax is a pernicious second tax, which I would abolish altogether—but why is it wrong to save for insurance policies related to a trust?

Mrs. Villiers
To be fair to the Paymaster General and the Government, I do not think that they are actively against saving, and I do not believe that their motivation in schedule 20 is to try to discourage saving. However, the reality is that the new charges are a tax on thrift, prudence and responsible behaviour, which is why the Opposition oppose the new inheritance tax charges.

Dawn Primarolo
But does the hon. Lady agree with her hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) that inheritance tax should be abolished—yes or no?

Mrs. Villiers
We have made it clear that we are not making promises to cut taxes at present. We accept the long-term importance of reductions in taxes, but—

Dawn Primarolo
rose—

Mrs. Villiers
I will give way to the right hon. Lady in a moment.

We have promised to share the proceeds of growth between real increases in public spending and reduced borrowing and taxes over the economic cycle.

Dawn Primarolo
If the hon. Lady is not making any commitments at all, bearing in mind what her hon. Friend the Member for Macclesfield said about abolishing inheritance tax, will she give him an undertaking that she will consider the matter and inform him and the House in due course?

Mrs. Villiers
Our tax reform commission is looking at all those issues, and it will report very soon.

We are not discussing the current inheritance tax regime, however, but penal new inheritance tax for people who use trusts to provide responsibly for their future and for the future of their family. The new taxes will operate in an arbitrary way, because the value of the life insurance policy—[Interruption.]

Mr. Speaker
Order. The Economic Secretary should not interrupt the hon. Lady, because it is unfair.

Mrs. Villiers
Thank you very much, Mr. Speaker.

Sir Nicholas Winterton
I am not seeking a commitment from my hon. Friend that we should abolish inheritance tax. I was expressing a view as an independent Conservative—the tax is pernicious, and we should consider abolishing it in due course—but I was not asking her to give a commitment.

Mrs. Villiers
I am grateful to my hon. Friend.

Returning to the subject of the debate, the arbitrary operation of schedule 20 in relation to life insurance policies arises because those policies depend on the health of the person insured. They have virtually no market value unless the insured person is very ill or terminally ill. If the 10-year anniversary occurs when they are fit and healthy, the value of the policy is minimal, and inheritance tax is not payable, because its value is likely to be below the nil rate band.

If, however, the insured person becomes seriously or terminally ill just before that 10-year anniversary occurs, that could push the value of the policy above the threshold and the IHT charge will apply. At this point there is no property in the trust to pay the tax, and the insured person faces an unwelcome extra tax bill at a time when their possibly terminal illness presumably means they are too ill to work. Remember, the proceeds generated by such policies must be very considerable to give bereaved families a sufficient income on which to live, so it is entirely possible that a tax charge will be triggered in this situation. Not only is schedule 20 a tax on prudence, but in this instance it is a tax on terminal illness as well.

Opposition amendments Nos. 3 and 4 would take policies such as term insurance, whole life insurance and critical illness cover out of the scope of the new charges. The amendments are drafted to take out policies that insure against a specific risk or tragic event, such as early death or critical illness hitting the family’s principal breadwinner. They are designed to leave other insurance policies, which are essentially savings-based, within the new schedule 20 framework. The ABI expressed support for similar amendments tabled in Committee, stating:

“We are particularly concerned about the impact”—

of schedule 20—

“on individuals buying life insurance to protect dependants from financial hardship following death or serious illness…It is important that people should be encouraged to take financially responsible steps to protect their dependants from hardship in the event of a tragedy. The tax system should not create disincentives for prudence by introducing unnecessary tax charges. Life insurance offers valuable financial protection for individuals and their family in the event of an early death or serious ill-health, which can have dramatic adverse consequences particularly if the life insured is the main or only income provider. It provides the means for those even on modest incomes to be self-reliant and not dependent on the state for hand-outs.”

John Bercow
Naturally, we await the Paymaster General’s response with eager anticipation, bated breath and beads of sweat upon our brows, but as I hear my hon. Friend develop the argument against the measures that the Government are proposing, it beggars belief that Ministers can propose a manifestly callous and mean-spirited provision. Was it dreamed up by some parsimonious official or is it the preferred position of members of Her Majesty’s Government?

Mrs. Villiers
No doubt the Paymaster General can respond for herself, but I fear the Government did not think through their proposals or did not understand their consequences.

Most people in Britain are hopelessly underinsured. Those who insure are far less likely to fall back on benefits and state support than those who do not. Slapping arbitrary punitive new taxes on those who seek to make provision for death or serious illness to the main breadwinner makes no sense. It penalises thrift and prudent behaviour, and we hope the Government will support our amendments.

The last set of Opposition amendments would remove the threat that an increased tax bill could be added by schedule 20 to all the other unhappiness that occurs in divorce cases. I refer to Mr. Ian Buckley of Rathbone solicitors, who explains the problem as follows:

“The current trend of family breakdown and multiple marriages has resulted in the increased use of trusts. They provide a fair and workable solution in the division of assets in circumstances of both death and divorce. They are widely used in the divorce courts and the inflexible arrangements in the new rules outline will be a poor substitute.”

Following the raft of Government amendments moved in Committee, the Chartered Institute of Taxation states:

“Overall we give the changes one and a half cheers—there are still things to be done. We now need the Government to show they have listened to all of our arguments about the defects in these proposals, and to make similar changes”

where schedule 20 impacts on divorce.

In this context, trusts are used to give the spouse with the main child care responsibilities the right to live in the family home until the children finish their education. At this point the home is sold and the proceeds divided between the former spouses. Such arrangements will be protected from the 20 per cent. entry charge of schedule 20 by section 10 of the Inheritance Tax Act 1984, but not from the 6 per cent. periodic charge.

The Treasury seems to assume that everyone can have a clean-break settlement. If they are able to do so, most people will indeed prefer a clean-break settlement for various reasons, emotional as well as financial. However, not everyone can afford a clean-break settlement. Trusts are an invaluable aid in making the assets of one household stretch to cover two. The people who will be penalised in this context, as in all the other contexts where schedule 20 applies, are those who have sufficient assets for them to come within the inheritance tax net, but not enough for them to have sufficient capital to spare for outright transfers and a clean-break settlement—the sort of people of modest means who have been hit all too often by the Chancellor’s stealth taxes.

Remember that we are referring to homes here, and in many cases, particularly in London and the south-east, the value of those homes will exceed the inheritance tax threshold.

Mr. John Redwood (Wokingham) (Con)
My hon. Friend makes a good case for there being a number of great difficulties that vulnerable people will face as a result of this legislation. Would it not be easier for the Government just to drop all these proposals on trusts and go back to where we started?

16:30:00

Mrs. Villiers
That would indeed be a highly desirable result and the Government still have the opportunity to do that if they so wish. I certainly hope that they do. This is the Minister’s last chance to save divorcing couples and people in a civil partnership facing relationship breakdown from an unwelcome new tax charge, and I hope that she will seize that opportunity.

The Government went badly wrong with schedule 20. Their preconceptions about trusts and the people who use them were fraught with misunderstanding and, frankly, with prejudice. The Star Group of solicitors, expert in the field of trusts, points out the simple truth that has somehow eluded the Government, that

“trusts are very often set up for reasons that are nothing whatever to do with tax…they are widely used to prevent families’ assets from being squandered…to protect individuals from themselves or others”

and to maintain family harmony.

The Government have failed to produce any empirical evidence of the widespread use of trusts for avoidance purposes, apart from bare assertions and a couple of theoretical examples. Nor have they responded to the direct request of the Treasury Committee to provide evidence for their assertion that only a minority of a minority of 100,000 discretionary trusts would be affected by schedule 20.

The Government may have U-turned on a number of hugely important points, but schedule 20 still imposes new taxes on thrift, prudence and responsible behaviour, on the sick and the dying, on divorce, and on the mentally ill and disabled.

I close by quoting an e-mail that I received just a few days ago that illustrates the high human cost of this whole debacle. It reads:

“My father was seriously ill earlier this year. His will is in favour of his 6 grandchildren and contains a trust with the age set at 25…Because of the Finance Bill, I had to arrange for his solicitor and both executors”—

to see him—

“so he could say whether he wanted them to maintain 25 or pay the penalty or revert to 18. So there he was lying in bed coughing up a lung, 88 years old…terrified of dying, and I had to explain all this. He cried for a couple of days after from distress. How many others I wonder have had to do”—

the same?

Julia Goldsworthy (Falmouth and Camborne) (LD)
The Government have been at great pains throughout the Committee stage to point out that there are some areas where there is abuse of the trust system in relation to inheritance tax, and their proposals would close those loopholes. In their efforts to do so, where we have felt that there is a case to be made, we have supported them. However, the initial publication of the Bill raised huge concerns about the number of people who would be affected by the changes. In particular, concerns were raised about the treatment of spouse exemption, and fundamental concerns were raised about how the assumptions behind the spouse exemption had changed—instead of spouse exemption from IHT being automatic, it initially appeared that it would apply only if certain criteria were fulfilled.

Government amendments at Committee stage dealt with the issue explicitly and the fears of many people were allayed. However, had the Government taken the time before the Bill’s publication to consult, they might have avoided so many people fearing that their arrangements would have to be changed and that they would be affected by the Government’s new proposals, when in fact that was not the case. However, as the hon. Member for Chipping Barnet (Mrs. Villiers) has pointed out, there are still areas of considerable uncertainty, where trusts are used not to avoid IHT, but to make satisfactory family arrangements, particularly in difficult family circumstances.

It is those issues that many of the latest Government and Opposition amendments seek to address. One need only look at the amendment paper to see how many amendments have been tabled, not only in Committee but at this very late Report stage—60 Government amendments and many more Opposition amendments—and still there is a great deal of uncertainty in many areas. Some of the broad issues have been outlined in new clause 2.

Dawn Primarolo
There are not 60 Government amendments in this group, although I do not think that that was what the hon. Lady meant to say. Secondly, in every Finance Bill Ministers say in Committee that they will go away and look at something, and if they think that there is a case, they may table amendments. In fact, we have tabled an amendment on a matter that the hon. Lady raised—is she suggesting that I should not have done so?

Julia Goldsworthy
Of course I am not suggesting that those amendments should not have been tabled. However, it is unprecedented that we have this many amendments, which would significantly alter the sense of the measure. Great uncertainty has been expressed by many professional bodies.

Government amendment No. 70 deals with an issue that I raised in Committee on the part of schedule 20 that deals with trusts for bereaved minors. In Committee, I raised concerns about the Bill as it then stood, which allowed favourable treatment in respect of inheritance tax for bereaved minors, but only if the trusts in question were set up by a parent. Government amendments made in Committee resulted in the measure being extended to include step-parents. However, minors whose legal guardians were not their parents or step-parents would have been very vulnerable because they would not be provided for under the measures. The amendment deals with that problem. It extends the provisions to all those who have parental responsibility under the Children Act 1989 for England and Wales, the Children (Scotland) Act 1995 for Scotland, and the Children (Northern Ireland) Order 1995 for Northern Ireland. Although the conclusion on this has probably not been reached in the most efficient manner, the result is a vast improvement on the original proposal, so we will support it.

I now come to Opposition amendments relating to bereaved minors. My understanding of amendment No. 58 is that it would create a situation in which the trustees of the will of a parent of a bereaved minor could set up a trust for the benefit of the minor. I support the amendment, as it offers further safeguards for those very vulnerable young people.

There are several Government and official Opposition amendments that address questions that remained following debates in Committee on transitional serial interest, but fundamentally the Government amendments do the job. Government amendments Nos. 74 and 75 set out that serial interest can be extended beyond 2008, but only when the spouse succeeds upon death. That was the only real area in which spouse exemption remained in some doubt. There would be some existing pre-22 March 2006 life interest trusts for one spouse to provide for the other spouse to take a successive life interest after their death. If the schedule were left as originally drafted, it would have overwritten that spouse exemption if the life interest was passed on after 2008.

I want to raise a question with the Paymaster General about the difference between the Government and Opposition amendments. Opposition amendment No. 59 would extend the scope laid out by the Government amendment to outside death by also applying to situations in life. Why did the Government decide to make the provision applicable only on death, but not in life?

Concerns have continued to be raised about how narrowly drawn are the restrictions surrounding the eligibility to fall within the proposals for disabled trusts. Although Government amendments Nos. 80 to 85 ensure that disabled life interest trusts will not be affected by the changes made to the inheritance tax treatment of other life interest trusts, concerns remain about how narrowly drawn are the definitions of “disabled”. Liberal Democrat Members have supported a series of Opposition amendments that have tried to draw definitions in more modern terms that reflect more recent legislation on this issue.

As things currently stand, the definitions of disability are out of date, so many people who today are classified as disabled will be excluded under the Bill. Organisations such as Mind have been working with the Low Incomes Tax Reform Group to help to overcome these problems. I understand that the LITRG helped to draft amendments Nos. 5 to 12. The amendments would help to address those concerns, so I will support them. Among such organisations’ primary concerns are individuals with fluctuating conditions, such as manic depression and schizophrenia, and also people with some physical disabilities, such as multiple sclerosis. They were keen to impress that all disabled persons should not be exempt, but that the proposals in their current form would mean that those who could not cope with a large inheritance or gift could still fall outside the regime. They therefore strongly believed—I support them on this—that reference to the Mental Capacity Act 2005 would be better able to capture the issue regarding capacity, because it is able to capture partial capacity. There could be someone with a physical disability. That person may have no problem in managing their financial affairs or vice versa. That is why amendment No. 11 points to a definition of capacity in terms of lacking capacity

“within the meaning of the Mental Capacity Act 2005, in relation to any financial matter”.

The terms of the Act are flexible enough to include definitions of partial capacity.

The amendments allow for greater flexibility in the creation of trusts. At present, only the affected individual can self-settle if they have a condition that they expect will lead to disability. If they are already ill, someone can create a settlement for them. Those who expect to become unwell or have a fluctuating condition have to self-settle. Amendment No. 5 allows for others to set up similar self-settlement trusts. The wider amendments bring in the 2005 Act for a lower level of severity and then will enable someone who expects to be unwell to have a settlement created for them.

Rob Marris
For how long should these trusts last? Given the sort of disability to which the hon. Lady refers, some people will have a disability and then recover. Should the trust then be wound up? What would she say should be the tax situation then?

Julia Goldsworthy
We do not want vulnerable people who may have a partial lack of capacity in financial matters finding themselves falling out of a regime that was designed, in theory, to help to support such people.

In Committee, the mainstay of the Government’s strong position towards these proposals was based on the results of consultation that was carried out two years ago. The Paymaster General has already referred to that consultation. The consultation took place on a different subject in relation to income tax and capital gains tax. It preceded any of the deliberations on the changes that have been set out in the Bill, and pre-dated the 2005 Act.

The organisations that contacted me were at pains to point out that the consultation barely referred to definitions of disability and involved only a few disability organisations, of which none was a mental health organisation. In some areas the consultation has been superseded by the amendments that have been put forward by the Government.

Dawn Primarolo
It would help me enormously if the hon. Lady would list the organisations that approached her. I would then be able to list those that agreed with the definition.

Julia Goldsworthy
I understand that there were representations from Mind. I was provided with further information about the details of the consultation. The representatives were concerned that no mental health organisations were included in the consultation. Will the Government undertake proper consultation on these matters, given that the Bill has created a new situation that was not covered by prior consultation?

Dawn Primarolo
I will put a proposition to the hon. Lady, and I would be grateful if she were to respond to it. The Government consulted two years ago with many organisations, which I shall list. Those organisations agreed with the definition that is currently being used. The hon. Lady has quoted one organisation, and another representative, as saying that they do not agree with the definition. She then asserts that we should provide a definition in a Bill that is not yet law. Why should there be consultation on that basis when we have already undertaken consultation?

Julia Goldsworthy
The 2005 Act is on the statute book. Even if it has not yet been implemented, definitions are clearly stated and are on the statute book. Perhaps the Minister will refer to which mental health organisations took part in the consultation process. If she did so, I would be grateful.

Another key area is that of trusts that are commonly used to sort out family arrangements. That is not as a means of avoiding inheritance tax, but of relationship breakdowns settlements. There is a series of official Opposition amendments on that. Trusts are commonly in use as a means of settling assets in the context of a financial settlement. A primary reason is to ensure that, for example, children have a roof over their head or are able to remain in a family home. Some of those trusts are established by a court order. What is the basis of withdrawing some of those options for the family? Was there any evidence of inheritance tax avoidance in such cases? What alternatives would the Government propose for families facing these circumstances? Although other measures such as clean break orders, legal charges and other devices are available, what is the rationale for targeting trusts in that area in particular?

16:45:00

The Law Society has raised the concern that not all the alternative devices will be appropriate for all families:

“For example, the use of clean break orders is only feasible where a couple have sufficient assets to enable an outright division of assets between so as to provide both with a home. For many families, where the only significant asset is the matrimonial home (and whose value is over the inheritance tax threshold, currently £285,000) this is not a realistic option since the sale of the house may not raise sufficient funds to provide a home for both parties.

Where assets are transferred from one spouse to another, the spouse exemption does not apply if the transfers take place after decree absolute. Under Schedule 20, the spouse exemption would now not apply before decree absolute where a new trust is created by one spouse for the other. This we believe wrongly penalises the use of trusts on divorce settlements.”

Dawn Primarolo
I have already heard that point from the hon. Member for Chipping Barnet (Mrs. Villiers), who was lobbied by the same people as the hon. Member for Falmouth and Camborne (Julia Goldsworthy). However, there is an alternative, because a charge could be taken on the property, so it is simply not true that it cannot be done. Those who have been unfortunate enough to go through divorce know that the normal procedure, if a clean break cannot be made, is that a charge is taken on the property.

Julia Goldsworthy
I understand from explanations given by the Paymaster General that the intention behind the changes on the use of trusts was to tackle inheritance tax evasion, but I wonder whether she will state the extent of avoidance in that area.

The hon. Member for Chipping Barnet has discussed some of the remaining problems on life insurance. I declare an interest as someone who took out a life insurance policy after the Budget, but before the Finance Bill, because I still do not know how I will be affected. My estate is well below the inheritance tax threshold, but I understand that I may still need to change my affairs, which I have recently set up—there is a still a lot of uncertainty.

On Second Reading, concerns were raised about the number of people affected by the proposals. Again, I ask the Treasury to publish the background work that it undertook before determining whether a regulatory impact assessment was necessary. It has been stated in written answers that it is not “normal procedure” to publish that information, but given the fact that the Treasury Committee asked for it before the Bill was considered in Committee, is there any reason why the Treasury cannot make it available, because many organisations and individuals would benefit from knowing the intended scope of the regulations?

It has not been explained why wholesale changes to the provisions on trusts are required to tackle what the Government have emphasised is still a small number of abuses. Although the key concerns surrounding the spouse exemption have been removed, in other cases normal family arrangements will fall foul of the rules, although there is no evidence of trusts being used to abuse the exemption.

The potentially exempt transfer option remains for those who want to transfer their wealth and escape inheritance tax, provided that such individuals have the liquidity and life expectancy to fulfil the requirements. Given the harshness with which the Government have approached the trust regimes, do they have similar plans for potentially exempt transfers?

The Government have improved the legislation, but there are still plenty of rough edges, despite all the amendments tabled in Committee and on Report. I fear that we will have to revisit the issues and deal with further unintended consequences in future Finance Bills.

Mr. Redwood
Unusually, I find myself in sympathy with amendments tabled by hon. Members on both sides of the House, which is a tribute to the mess that clause 2 and schedule 20 were in before the Bill was considered in Committee.

I am delighted that the Government have seen fit to make modest improvements around the edges, but I hope that they will think again about both the clause and the schedule and realise that the Bill would be better and stronger without either of them, because the existing regime of trusts works okay. It was not full of scandal or the centrepiece of tax evasion and avoidance. The provisions are therefore unnecessary.

The explanatory notes state:

“The clause and Schedule align the inheritance tax (IHT) rules for assets held in trust…The IHT treatment for trusts which do not come within the special rules will be aligned with the mainstream IHT rules for trusts. The clause and Schedule provide transitional arrangements for existing trusts.”

We have never had a satisfactory explanation of where that emanated from. Those who wish to be kind to Ministers could say that the provisions are a product of a bureaucratic mind that likes compatibility, tidying and creating symmetry in a complex and evolving tax structure. If that is all that has happened, Ministers should have no hesitation in dumping the provisions immediately. The worst thing that a Minister can do is give in to a bureaucratic request that something should be tidied up, aligned or changed for the sake of it.

The alternative explanation, which we have sometimes heard from the Treasury, is that Ministers believe that they are trying to tackle a problem. They appear to believe that, from time to time, the trust arrangements enable people to avoid paying inheritance tax, which the Government think they should pay. The case would be greatly strengthened if we had more reliable numbers and it would be useful if the Paymaster General could tell us more about how much more missing tax revenue would be captured if the Government amendments were accepted but the others were not. The Government should remember that there are knock-on effects to the proceeds from capital gains tax, which should also be taken into account. Some of those consequential effects would defer or prevent payment of CGT that would otherwise have fallen due. The position would not be win-win, even on the Government’s basis.

It is strange that a Government renowned for their fascination with the popular mood and the media should choose not only to attack head on children, people who are in mourning and the disabled, but to do so at the same time. It is a rare and infelicitous conjunction in a Minister’s life to be on charges of being unkind to all three categories. Indeed, there is an even more hard-pressed category—children whose parents are recently deceased. One would have thought that they, above all, needed help and support from every adult in the community. However, that does not apply to the Government, who, in their new role of ruthless oppressors of anyone with any money left after all their other taxes, are now trying to squeeze out more from the minors who are in such unfortunate situations.

Rob Marris
Earlier, the right hon. Gentleman quoted the explanatory notes to clause 157. If he read on—I am sure that he did—he would realise that they continued:

“So far as new trusts are concerned… it continues the current special treatment for ‘interest-in-possession’ trusts created on intestacy and straightforward interest in possession trusts created by will; and for ‘accumulation and maintenance trusts’ to trusts created on the death of a parent where beneficiaries will take the trust assets at age 18.”

Although the right hon. Gentleman may argue—incorrectly, in my view—that the Government are attacking specific groups, he is wrong about the recently bereaved.

Mr. Redwood
Although the Government have moved somewhat to protect vulnerable groups in specific circumstances, the protection is not comprehensive. There will be hard cases and difficulties if all we do today is accept the Government amendments. The simplest way to protect vulnerable people is not to proceed in that direction. We therefore revert to the fundamental questions: what is the purpose of the provisions? How much money is at stake? Are the Government sure that they will capture a few rich people who use the current system unreasonably, in their view, while not capturing many others? We have learned that those others perhaps include the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who imprudently took out a life protection policy without knowing what her tax position would be. Wallowing in ignorance in that way, with one’s money at risk under the very measure that one is trying to amend or improve, is not a good advert for Liberal Democrat advice on financial planning. Obviously, the hon. Lady has a lot to learn in all sorts of ways as she trains on the job of speaking to the difficult set of clauses and schedules before us.

Those on the Treasury Bench find themselves in some difficulty over these measures. I do not think that they have a great deal of enthusiasm for the job in hand; I do not see them leaping to their feet to say that this is the best thing that they have ever done. I do not suppose that they will include in their leaflets to their constituents the fact that they are proud to have done considerable damage to the trust regime for those who are divorcing. Nor am I sure that that will be the leading subject in their election leaflets when we get to the next general election. They will not be saying, “I have great news, o electors! The Labour party has managed to make your divorce even more painful and to secure even more money for the Treasury rather than for you.”

Dawn Primarolo
May I say how much I am looking forward to seeing the right hon. Gentleman’s next newsletter, in which he explains this issue to his constituents? If he believes what the hon. Member for Chipping Barnet (Mrs. Villiers) has said, but it turns out not to be true, he will have to issue a subsequent newsletter.

Mr. Redwood
I am always extremely careful to check the accuracy of the information that I put out to my constituents, and I am pleased to say that, so far, I have not had to send out any corrections. I will endeavour to be equally careful in the future. However, I will not find myself in the position of having to put out an apology or an explanation of why my party has backed a silly scheme that messes around with the complex tax regime on trusts in such a way that it might capture the vulnerable as well as those—whom the Government have still to name—who are apparently more worthy targets for increased taxation.

It gives me great pleasure to support the noble work of my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) in trying to chip away at the undesirable consequences of this clause and schedule. I am not sure that I am in sympathy with the hon. Member for Falmouth and Camborne, however, whose remarks were as tedious as they were opaque. I look forward to the Government having third thoughts on this matter. I enjoyed their second thoughts, which were certainly better than their first thoughts. When in doubt, Ministers should not legislate, not proceed, not pass “Go”, and not collect our £200. They should think again, ditch the clause and the schedule, then we would all be much better off. We could then put something in our newsletter about which we all agreed, namely, that it was a good idea that, on this occasion, the Government had thought better of legislating.

Mr. Dunne
I am extremely honoured to follow that highly entertaining and thought-provoking contribution from my right hon. Friend the Member for Wokingham (Mr. Redwood). I rise to discuss some of the issues on schedule 20 that were picked up in Committee, and I should like to start with the Government’s two-and-a-half-year consultation period on the modernisation of the trust regime, during which the age reduction for accumulation and maintenance trusts from 25 to 18, as proposed in the schedule, was not raised.

Rob Marris
I am trying to cast my mind back to the Committee proceedings. Will the hon. Gentleman tell the House whether he has an interest to declare?

Mr. Dunne
I am most grateful to the hon. Gentleman for that reminder. I declared my interest at almost every sitting of the Committee, and I am happy to do so again today. I am a settlor of an accumulation and maintenance trust for the benefit of my children, which gives me a certain amount of authority on this subject, unlike the Government, who appear to have entered into these arrangements without any understanding of their implications—as we have heard, they are now into the third set of major revisions—and without any consultation with the industry on the extent of the supposed mischief or abuse that the measures were designed to prevent. The Paymaster General was challenged repeatedly in Committee to provide evidence of the abuse, but was able to come up with only one or two astonishingly tortuous examples. When challenged by my right hon. Friend the Member for Wokingham, she could provide no information on the scale of the abuse, but I hope that she will now have been briefed on how widespread it is.

Dawn Primarolo
The hon. Gentleman is not fairly reflecting what happened in Committee. The Committee asked for examples, and I gave examples. Conservative Members do not like the examples that I gave, and consider them theoretical. Amazingly, that does not stop them advancing a theoretical case to attack the Bill. I gave the hon. Gentleman the evidence: I specified the types of tax planning. He does not agree with me, and that is fair enough, but I did supply the evidence.

17:00:00

Mr. Dunne
The Paymaster General is obviously somewhat irritated by my accusation that she failed to give proper evidence. What she did give were two theoretical examples. On several other occasions, she listed organisations that had substantiated the case she was making, but in this instance she did not mention any, presumably because there was none.

That takes me to the point that I wanted to make about the age issue. The Government are trying to introduce a blanket change in the age limit below which children can benefit outright from the accumulation of maintenance trusts, without taking account of the individual circumstances of many of those children. Given that people become adults at the age of 18, I might be using the word “children” rather loosely. We are talking about young people under 25.

It is not unheard of for people to acknowledge that the financial sophistication of those under 25 is not what one might hope to see in more mature adults. Most commercial industries that must contend with those aged between 18 and 25 in a financial context impose certain constraints. Most mortgage lenders, for instance, have their own policies on the granting of mortgages to young people, but many require a parental guarantee. Those aged between 18 and 25 are likely to pay higher motor insurance premiums, because they are perceived to be a greater financial risk to the insurance companies. Many car rental companies will not allow people under 25 to hire cars, or, if they do, will impose a surcharge.

In March this year one of the Government’s own regulatory agencies, the Financial Services Authority, undertook research in an attempt to establish how sophisticated young people were in financial matters. It concluded that

“whilst the need to plan ahead is perhaps greatest in early adulthood, financial capability in terms of planning ahead clearly improves with age”.

Those aged between 18 and 20 scored 27 out of 100 in terms of financial capability, while those between 20 and 29 scored 40. One of the Government’s own regulatory agencies has acknowledged that people under the age of 25 are not as well adjusted to the business of dealing with their financial affairs as older people.

I wholeheartedly agree with my right hon. Friend the Member for Wokingham. The schedule has been dreamt up by the Government for reasons that were not thought through properly, hence the plethora of amendments with which we are regularly having to deal. In my view, the logic stems from the Government’s resentment that people may be in a position to control the distribution of their money during their lifetimes. What they are doing is meddlesome and interfering, and it is characteristic of their approach.

There is a specific illogicality in the Government’s actions. The Paymaster General has tried to claim that they are simply bringing the inheritance tax regime relating to trusts of this kind into line with those relating to others. That might be so in a very narrow sense, but the Government are also throwing the system completely out of kilter with the existing inheritance tax regime relating to gifts. Clearly, someone who places assets in a trust—often for sound practical reasons—will no longer be able to benefit from the potentially exempt transfer regime, and must therefore subject those assets to potential inheritance tax charges that did not exist before. That is not tidying up, but creating an additional layer of complexity.

I support what my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) said about the definitions of disability. On a couple of occasions, we discussed in Committee the means of ensuring that the Bill provides an appropriate definition to cover people who are experiencing either partial or fluctuating capacity or who have a progressive illness. We discussed individual illnesses and conditions at some length.

Although the Government have made some movement, they have still failed to address the matter adequately. The issue of the settlor who is able to benefit from the exemptions for disability has been dealt with poorly. The provisions do not cover individuals who become disabled or people who are in a position of parental authority. That amounts to a glaring omission, which I hope the Paymaster General will reflect on and seek to put right. I am thinking particularly of people who are made wards and where courts or insurance companies, neither of which are in a position of parental responsibility, are making provisions to set up trusts.

In conclusion, it appears that the Government are seeking to deal with an abuse that they have failed to prove. They are seeking to impose constraints on individuals and how they organise their financial affairs, which shows their mistrust of people. I wholeheartedly endorse the suggestion of my right hon. Friend the Member for Wokingham that the Government should scrap the schedule in its entirety.

Stewart Hosie (Dundee, East) (SNP)
There was a great deal of uncertainty when the Bill was published and when it began its progress in Committee. The large number of amendments that were supported by hon. Members of all parties is testament to that, and some of the uncertainty remains. I hope that it will be fixed by the Government amendments and others as we progress. I am particularly pleased with Government amendment No. 70, which brings those with parental responsibility into play in the same way that birth parents are in respect of trusts. We discussed that issue in Committee and I am delighted that the Government have taken it into account.

I shall not re-summarise all the briefing notes that others have mentioned—we have all read them anyway—but I shall make one or two specific points. It is important to discuss vulnerable people and I am not at all convinced that the definition of such people is sufficient. It is too narrow and some vulnerable people clearly fall outside the specified disability living allowance category. I would like to bring to the House’s attention a letter from a small solicitor firm, J W Hughes and Co. from Llandudno, which was given to me by my hon. Friend the Member for Meirionnydd Nant Conwy (Mr. Llwyd). The letter makes that very point—that some vulnerable people fall outwith that definition. The concern was expressed by a small county lawyer with no political axe to grind.

It is interesting that other lawyers have approached me about other issues. Even as the amendments were being progressed and more information was emerging about the shape of the Bill, there remained a great deal of concern about the number of wills that would have to be changed as a result of insurance and other policies being written into trusts in the wills. Another local solicitor—a small, county solicitor based near my constituency—advised me that his business has some 18,000 to 19,000 wills under management and that in his best assessment about 40 or 50 per cent. of them would need to be changed. Unfortunately, it is not certain which 40 or 50 per cent. will require it. It may be based on a misunderstanding that the changes will impact only on trusts and funds that breach the inheritance tax threshold. None the less, I ask the Paymaster General to concentrate on the issue of vulnerable people and how they will be looked after under the new regime. She should also focus on the inheritance tax threshold with particular regard to the great fears of many people and many law firms about the potential for hundreds, thousands or millions of wills having to be changed.

Mr. David Gauke (South-West Hertfordshire) (Con)
In the continuing debate about these matters, and especially in respect of the definition of a disabled person, the Paymaster General has made great play of the fact that a consultation process was held two years ago and that a particular answer was reached. I shall return to that in a moment, but we are discussing the question of trusts today, a matter that was debated at some length in Committee. It is therefore somewhat ironic that the right hon. Lady should praise the role played by consultation, given that the Government have produced a set of proposals in respect of trusts without engaging in any consultation at all.

The proposals have been rushed out, but the Government have not asked legal professionals or accountants how trusts work in reality. They have failed to understand how insurance companies draft policies, or how lawyers draft wills. The hon. Member for Wolverhampton, South-West (Rob Marris) quoted from the explanatory notes, but they were drafted before the Government came up with the various amendments that they have tabled to schedule 20.

In essence, the hon. Member for Wolverhampton, South-West said that straightforward interest-in-possession trusts would be unaffected by the Government’s proposals, but the reality turns out to be somewhat different. Under the original wording of schedule 20, a standard will—for example, one in which a person who gets married for a second time seeks to ensure that the second spouse receives an interest in possession but that the capital goes to the children of the first marriage—would indeed have been affected.

As a result, both in Committee and again today, the Government have staged a series of withdrawals from their original position. Their approach deserves very serious criticism, as there is no good reason why the matter could not have been consulted on. The Paymaster General rightly said that, in Committee, she gave examples of potential abuses under the existing law, but Government projections suggest that we are talking about only £15 million in the first year. The amounts involved are not so sizeable, nor the abuses so great, that the Government had to deal with the matter with such enormous urgency. Why was there no consultation, especially when the Government were consulting about trusts in any event?

Indeed, Her Majesty’s Revenue and Customs considered that trusts should be tax neutral. It said that, although trusts should not be used as a way to avoid tax—and I entirely agree with that—it also believed that artificial obstacles should not be raised against their use for that purpose.

Mr. Brooks Newmark (Braintree) (Con)
Does my hon. Friend agree that the Government suffer from a cultural problem? They believe that any trust is set up to avoid tax so, rather than going into detail and understanding the nuances of trust, they simply use a rather blunt instrument and say, “Trusts are bad, and therefore we will do anything to shut them down.”

Mr. Gauke
My hon. Friend makes an excellent point. During the Bill’s passage through the House, people have asked repeatedly, “Why would anyone set up a trust? It must be a mechanism for tax avoidance.” They have not appreciated that there are non-tax reasons for setting up a trust.

Moreover, why are the Government suddenly so concerned about trusts? They have been in power for nine years and not done much about them, but trusts have suddenly become a major issue. That leaves me somewhat bewildered, and we have heard no explanation.

I am a member of the Treasury Committee, which asked the Government how they had arrived at their estimate that the new rules on the tax treatment of certain trusts would affect only a minority of the 100,000 discretionary trusts. As yet, we have had no answer.

Mr. Newmark
Will my hon. Friend give way on that point?

Mr. Gauke
I give way again to my colleague on the Treasury Committee.

17:15:00

Mr. Newmark
I thank my hon. Friend, who raises an important question: why are the Government going to such enormous lengths? I suggest that it is because they are quickly running out of cash, so they are trying to be more and more creative in squeezing money out of every corner and every orifice of the people living in this country.

Mr. Gauke
My hon. Friend may be right, albeit rather inelegantly. I am not entirely sure what the explanation is; perhaps the Paymaster General will enlighten us later.

Mr. Redwood
My hon. Friend is the only person to have supplied a figure. As he rightly reminds us, £15 million was the first year forecast. Has he any thoughts about how much of that £15 million will be given back by the 27 Treasury amendments tabled for that purpose today?

Dawn Primarolo
None.

Mr. Gauke
My right hon. Friend the Member for Wokingham (Mr. Redwood) makes an excellent point. The Paymaster General’s response suggests that the original drafting was poor; there was certainly much uncertainty and the amendments could have resolved the matter. However, if the answer is none, why did we go through all these proceedings, when we could have been in the same position originally if the Treasury had taken its time and held consultations? It completely failed to do so.

The Paymaster General said earlier that part of the whole process of dealing with Bills such as this is for the Government to listen to outside advisers and make changes accordingly. I accept that amendments have been made to deal with uncontroversial technical points, but these provisions are more fundamental. The Government changed their policy substantially and produced something out of the blue, and then realised that their proposals would hit people they did not intend to hit. I accept that they did not intend the provisions to be as widespread as they turned out to be in reality. That is not listening to outside advisers—it is a fundamental failure.

The Government produced something that did not work and caused much upset and uncertainty. No doubt, it was a boon to the legal profession as clients charge off to their law firms for further advice, which is not to be welcomed—and I speak as a former lawyer.

As we have heard, there was consultation two years ago about the definition of a disabled person. It appears that the Government are insisting on continuing to rely on the definition in the Mental Health Act 1983. An alternative definition is available but we hear that they do not want to rely on it because it is in legislation that has not yet come into force. I am at a loss to understand why one should not use such a definition. The point of a definition is to define something; the context does not matter particularly. If the definition works, why not use it? But if the definition in the Mental Health Act and the alternative definition are inappropriate, why not use a new one?

There is widespread concern that the proposed law with regard to disabled persons and trusts is inadequate. I am grateful to a constituent who informed me of the submission made on that point by the Low Incomes Tax Reform Group, which stated that the definition in

“the Mental Health Act 1983 is inadequate to deal with people who have partial, fluctuating or diminishing mental capacity—people with a diagnosis of Alzheimer’s or Parkinson’s disease, for example, or of schizophrenia.”

I have heard nothing this afternoon to suggest that the Government’s approach is justifiable. They have made a series of U-turns and backed down on a series of points, but they should still concede some important points, and this is one of them. Perhaps the Paymaster General will make a forceful argument—no doubt, she will be forceful, but whether she will be persuasive is another matter—but the Government should table further amendment, as they have done on many occasions.

Most importantly, will the Government refrain from the cheap shot of putting out a policy that involves no understanding of how trusts work in practice and does nothing but cause uncertainty and create legal fees? The Government’s policy does nothing to address tax avoidance, but it encourages their Back Benchers to fly the class-warrior flag. That is poor government, and the Government have rightly had to back down.

Mr. Newmark
I will try to be brief and, rather than rehashing the points that we made in Committee, I merely wish to seek clarification from the Paymaster General on several points that she made, particularly with respect to amendment No. 5. In Committee, she admitted:

“For people who find it difficult or impossible to cope with the demands of owning assets outright, a trust will often be the most practical way for substantial assets to be held.”

However, what about people who find it difficult or impossible to cope with the demand of owning assets because of drugs, alcohol or gambling—the very point raised by my hon. Friend the Member for Chipping Barnet (Mrs. Villiers)?

The Paymaster General made three technical and non-substantive objections to amendment No. 5, which deals with the definition of disability—a point made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke). The first was that the new definition would conflict with trusts already in existence. The second was that the Mental Capacity Act 2005 is not yet in force. The third was that it applies only to England and Wales. Can the Paymaster General confirm whether she objects to the wider definition of vulnerability itself, or is she merely shying away from the technical difficulties?

The Paymaster General said:

“While I sympathise with the desire to keep the tax code up to date with developments in non-tax legislation, I do not consider that those particular changes would really improve matters.”

Is she acknowledging that matters need improving? If so, how does the legislation improve the situation faced by vulnerable people?

The Paymaster General further said:

“I can see the desired effect of the changes proposed by the hon. Member for Chipping Barnet, the route she suggests would be a difficult one to take at this point.”—[Official Report, Standing Committee A, 13 June 2006; c. 613-15.]

If the Paymaster General can see the desired effect, why can she not see another route? I look forward to her response to those questions.

Rob Marris
I am prompted to make some brief remarks by the many remarks made by Opposition Members. First, I reject the calumny that the Opposition have projected on to Labour Members that, somehow, we are not aware that trusts are often used for non-tax avoidance purposes. We are aware of that and I say that as someone who was a practising solicitor and who, on occasion, drew up trusts––although not for many years––and they were not for tax avoidance purposes. Many Labour Members recognise that, and I will not be tarred with the brush of being some kind of class warrior on this issue.

Correspondingly, it behoves Opposition Members to recognise more forcefully than many of them have done in Committee and today that, on occasion, trusts are used for tax avoidance and that, from our perspective, trusts are abused in that way. It is understandable that individuals will try to minimise their tax bills in any tax regime. It is also understandable that a Government, particularly a Labour Government, will occasionally seek to clamp down on that. That is part of what schedule 20, which is the principal point now under debate, attempted to do.

Mr. Newmark
I totally understand what the hon. Gentleman has said. In the same way that we should, and do, acknowledge some of the points that he raised—there are people who try to abuse the system through trusts—I ask Labour Members to acknowledge many of the valuable points that the Opposition have made, particularly with respect to the definition of disability, which at this stage is vague and woolly. We are simply trying to tighten things up on some of those points.

Rob Marris
Some of the points made by the Opposition have been valid and have been accepted by the Government. I wait with great interest to hear what my right hon. Friend the Paymaster General says about disability. The definition of disability, as I understand it, is not woolly. The hon. Member for Braintree (Mr. Newmark) may disagree with it. I quite understand that. He said that he disagreed with it. But it is not woolly. It may not be the right definition from his point of view, but it is precise.

The right hon. Member for Wokingham (Mr. Redwood) kindly accepted an intervention in which I read from the explanatory notes. My point was that that was, in a sense, a statement of aim by the Government as to what they hoped to achieve with schedule 20. Because it was an intervention, I did not carry on and read a large part of what followed, but with your indulgence Mr. Deputy Speaker, I will now read a little more from the explanatory notes to clause 157 and schedule 20. After the piece that I read out, which ended at “assets at age 18”, the notes state:

“Trusts for ‘disabled persons’ will also continue to enjoy special treatment.”

That was a statement of aim by the Government. There were problems and the Government listened to some of those criticisms—hence the Government amendments before us today, which I hope that my right hon. Friend the Paymaster General will explain.

I have had the pleasure of serving on five Finance Bill Standing Committees in my time in Parliament—there are hon. Members, and particularly right hon. Members, who have served on a great many more—and I suspect that a similar kind of procedure, on occasions, unfolded when the Conservatives were in government. Whether in the explanatory notes, or a Budget statement, or a Budget press release, there was a statement of what a particular series of measures embodied in a Finance Bill were intended to achieve. Then experts came along—whether it was Mrs. Gauke or the Chartered Institute of Taxation—and said, “Leaving aside for a minute whether we agree with that statement of purpose or aim, what you have put in your Finance Bill does not embody that and will not get you where you say that you wish to go.”

In terms of the debate in Committee and here today on where the Government wish to go with these trusts and the change in the tax regimes for them, the Government have listened. On some of the more technical aspects, they have said: “We set out clearly where we wished to go. We set out the clauses and the schedule in the Finance Bill by which we wished to achieve that goal. We have not technically always got it right. We have listened to those technical criticisms and we have tabled amendments that are in front of the House this evening—they are likely, in the nature of things to be passed—that will deal with those technical deficiencies.” I see that as a positive endorsement of the parliamentary process and of the way in which the Treasury and its Ministers listen—perhaps more than some right hon. and hon. Members give them credit for—to arguments and proposals made both by outside organisations and, within debate, by Members on both sides of the House. I applaud what the Government have done. They have listened.

As I understand the Government amendments—I am not a huge expert on them—they will get the Government much closer to the goal that they and I have. That goal is to clamp down on tax avoidance in certain areas, but still allow “special treatment”—to use the words from the explanatory notes—in the particular areas to which the explanatory notes refer. Those are sensitive areas in human terms and judging from the debate, all hon. Members broadly support them. I am talking about looking after individuals who have disabilities, whether or not they are minors, following the death of those who care for them and about broadening the definition of those who care for them, and also about looking after those, whether or not they have disabilities, who are minors when they are bereaved. I applaud what the Government have tried to do. As far as I can tell, they have got it right.

Dawn Primarolo
I am not going to try to persuade or convince the hon. Member for South-West Hertfordshire (Mr. Gauke), because he has told me clearly in previous debates that he absolutely disagrees with the principles that I assert and prefers to side with the advisers who have provided support to the Opposition in these debates. He will forgive me if I do not rise to that challenge, as I think that I will be wasting my time.

I will discuss the Government amendments and then answer the substantive points that have been made, particularly about disability and which is the appropriate Act for the schedule to use as its anchor.

17:30:00

Mr. Gauke
I think that the Paymaster General is referring to our exchange on Second Reading, when she argued that Treasury officials were saying that the original provisions in the Bill would not have a particular effect, and I argued that professional advisers were saying that it would have a particular effect. If I understand her correctly, I think that the Government’s position is now that those professional advisers were right.

Dawn Primarolo
No, the hon. Gentleman is not correct. He wriggles a lot. I fear that he has already made up his mind on which way he might vote, should there be a vote, regardless of what I say.

Mrs. Villiers
rose—

Dawn Primarolo
It might be sensible if I made a little progress. I will give way to the hon. Lady on substantive points, because she was generous in giving way to me when she made her long opening remarks––remarks which she has made several times now during the Bill’s passage.

Schedule 20 introduces changes to the way in which certain types of trust are treated for tax purposes. In particular, it brings the tax regime for accumulation and maintenance and interest in possession trusts in line with the mainstream inheritance tax regime for discretionary trusts that is already in operation. We have debated this topic at great length on the Floor of the House and in Committee. I do not propose to go over all the ground again, but it is necessary for me to respond to the points that have been made. Before doing so, I reiterate the central point that I have made from the beginning in discussions on this measure. Its purpose is to prevent wealthy individuals from being able to take tax advantage of trusts to avoid inheritance tax. That avoidance is clearly unfair and it is right that the Government should seek to counter it. Some hon. Members have sought to characterise that as an assault on trusts, but it is not. Generous provisions for trusts were in place before the Budget and will continue to be in place. The rules will not catch the large numbers of ordinary families that hon. Members have suggested.

Let me deal with two specific points on consultation and the Treasury Committee.

Mr. David Winnick (Walsall, North) (Lab)
I am sure that all Labour Members are delighted that this step is being taken. Does my right hon. Friend agree that there is something undesirable about the way in which successive generations of the very richest people in this country have been able to pass their wealth down through the years, indeed the centuries, as a result of all these trust arrangements? This affects the very rich, and why on earth should we start apologising it?

Dawn Primarolo
It is not a matter of apologising for the action that the Government have taken. It is clear that there is a tax regime in place for discretionary trusts and the changes being made are intended to bring two remaining types of trust in line with that. As the consultation document made clear, the Government are asserting that there should not be artificial tax incentives for using trusts—people should not be driven in that direction—although we accept, as I am sure my hon. Friend does, that, in a number of areas, which I will cover, trusts are appropriate structures that many people use to plan their affairs. The Government do not take issue with that in our proposals.

These clauses have a narrow focus, and hon. Members have touched on their revenue implications. I made it clear in Committee that it is not always possible to consult on matters to do with avoidance because there is always a risk of large-scale forestalling, particularly in this area. That was the case under Conservative Governments, as well as under this Government. Appearing before the Lords Economics Affairs Committee on 10 May, a leading member of the accountancy profession said that, in his opinion, there would be large-scale forestalling if there were consultation in this case. The Government have a fine record of consulting on our legislation, including drafts, wherever we can before it is incorporated in a Finance Bill, but there are still some points at which that is not possible, given the worries about forestalling.

Mrs. Villiers
Surely there could be no danger of forestalling when it comes to wills. People are not going to bring forward the date of their own death to forestall the Government’s legislation, so why does this measure retrospectively affect wills?

Dawn Primarolo
That is not worthy of the hon. Lady. She knows full well that we are dealing with the setting up of trusts and the tax advantages that some trusts had. She raised a number of other points, which I will turn to. She knows full well from her time in the European Parliament that there is a real and serious issue about forestalling on matters to do with tax, and any Government, regardless of their political persuasion, have to safeguard against that.

Mrs. Villiers
Will the Paymaster General give way?

Dawn Primarolo
No, I want to make a little progress on the point about consultation and the Treasury Committee.

Another point that continues to be advanced is the number of those who would be caught by the measure. I remind the House that 94 per cent. of estates pay no inheritance tax whatsoever, so the vast majority of people have no chance of paying inheritance tax whatever their will says. It is only a small percentage of estates—6 per cent., or 34,000—that pay inheritance tax. The persistent allegations about the scale of problems that the measure will cause are unnecessary and untrue.

On the Treasury Committee, I am not going to repeat what I said on the record in Committee about the estimations made by the Treasury of the number of trusts involved because that would be wasting the time of the House. I confirm that the Treasury Committee has, quite properly, received responses on all the matters that it raised in its report in line with the requirement on the number of weeks to be taken.

Mr. Redwood
What is the latest forecast of the extra revenue that will be generated if the measure goes through amended as the Paymaster General would like it to be? Does not this show that we have government by the lawyers, of the lawyers, for the lawyers?

Dawn Primarolo
The forecast in the Budget will remain the same if and when the Government amendments are made. The right hon. Gentleman has a great deal of experience, so he will know that work can be drummed up for lawyers and accountants in many ways including, regrettably, the use of scare tactics.

I shall deal briefly with the Government amendments in this group, which make the technical changes necessary to correct errors in the drafting of the Bill, before turning to the Opposition amendments. Government amendments Nos. 78 to 81 and 83 to 87 make minor technical changes to the operation of the rules for trusts for disabled persons and trusts established by someone who expects to become disabled in future. I hope that they will all be welcomed. Government amendment No. 78 makes provision for an interest in possession—IIP—for a disabled person to qualify as a disabled person’s interest when the property was put into a trust before 22 March 2006 but the disabled person only became beneficially entitled to it on or after that date. Without the amendment, that treatment would be available only to property put into trust on or after 21 March 2006.

Government amendment No. 79 is a drafting amendment to ensure that no inheritance tax arises when someone with a condition that is expected to lead to a disability settles property on themselves. Some Members have asked whether the existing provision risks a double charge, but the amendment makes it completely clear that such a settlement is not treated as a potentially exempt transfer. Government amendment No. 80 extends the rules in schedule 20 that apply when an IIP ends on or after 22 March 2006 to IIPs of which a disabled person is the beneficiary. Government amendment No. 81 deals with the rules in section 59 of the Inheritance Tax Act 1984—IHTA—that exclude a qualifying IIP from the inheritance tax charges on a relevant property. It modifies the definition concerning a company that is beneficially entitled to an IIP to include interests that were previously disabled persons’ interests. Government amendments Nos. 83 to 87 modify section 88 of the IHTA so that special treatment given to pre-22 March 2006 protective trusts is available, too, to trusts created on or after 22 March 2006, where the underlying interest is a disabled person’s interest.

Schedule 20 makes arrangements for IIP trusts set up before 22 March 2006, and Government amendment No. 75 is the core amendment in a series dealing with the transitional serial interest. It provides that a pre-Budget IIP to which someone becomes entitled on the death of their spouse or civil partner on or after 6 April 2008 will qualify as a transitional serial interest, and thus continue to be treated as owned by the surviving spouse or civil partner for inheritance tax purposes. Government amendments Nos. 71 to 74 restructure the existing provisions dealing with transitional serial interests in the light of that change, while Government amendments Nos. 76 and 77 make consequential changes elsewhere in schedule 20.

The hon. Member for Chipping Barnet (Mrs. Villiers) made a similar point in Committee, although the amendments that she tabled did not address the precise issue that we have tackled. Opposition amendment No. 59 returns to the matter and would enable the benefit under the trust to be passed between spouses and civil partners while they are both living. The Government amendments, however, provide that that can happen only as a result of the death of one partner. The Opposition’s approach is open to exploitation through the use of lifetime transfers, so I cannot accept it. Nevertheless, I hope the hon. Lady will agree that the Government’s amendments address the core concerns in this area, and I hope that she will support them.

17:45:00

Government amendment No. 82 is a minor correction to the transitional serial interest rules which provide for disabled person’s interests created for the settlor or their spouse to be disregarded when charging other trusts created by the same settlor. Opposition amendment No. 57 covers similar ground, but I am advised that there is a technical reason why it fails to hit the right target. Given the technicality of the subject, I hope the hon. Lady will agree that her amendment is not necessary. I assure the House that my officials will be happy to discuss the details with interested parties if necessary. The matter was debated at some length in Committee, and the hon. Lady and I agreed that it needed further consideration. I hope she will acknowledge that that has taken place.

Government amendment No. 70 deals with who should be able to set up a trust for a bereaved minor. That returns to the point that the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Dundee, East (Stewart Hosie) raised in Committee regarding legal guardians being able to set up trusts for bereaved minors. As I mentioned then, people other than parents can still set up such trusts. All that schedule 20 does is apply tax charges to amounts in excess of the £285,000 which is the current inheritance tax threshold. I asked my officials to consider whether a wider definition of “parent” could safely be put within the scope of schedule 20, and to examine the technical and legal difficulties associated with guardianships and the various definitions.

Government amendment No. 70 deals with that point. It extends the meaning of “parent” for these purposes to cover individuals who, immediately before they died, had parental responsibility for a child under the relevant legislation for England, Wales and Northern Ireland. For Scotland, the amendment refers to parental responsibilities under Scottish law. I am informed that the amendment provides the security that will allow the provision to operate. That means that anyone with parental responsibility will be able to create trusts that are exempt from IHT charges in the event of their death, in exactly the same way as parents can. I hope that hon. Members will welcome the change. I am grateful to those who raised the matter and debated it in such a constructive way in Committee.

Government amendments Nos. 90 to 96 deal with consequential changes to the capital gains tax regime. Amendment No. 93 alters a Taxation of Chargeable Gains Act 1992 reference, and amendment No. 96 extends holdover relief to property leaving age 18-to-25 trusts when the beneficiary attains or is under the age of 18.

Government amendments Nos. 88 and 89 make a small change to the way in which the new rules interact with section 144 of the Inheritance Tax Act. Amendment No. 89 allows a two-year period in which a will can effectively be rewritten to cover deaths that took place before Budget day, but where the rewriting takes place after Budget day. Amendment No. 88 is a straightforward drafting correction. In Committee the hon. Member for Chipping Barnet tabled amendments with a similar intention. She will recall that I noted at the time that the Opposition amendments were technically deficient, but I undertook to give the matter further consideration. I have done that. The hon. Lady has returned to the same point in her amendments Nos. 54 and 55, but I hope she will accept that the Government amendments deal with the point.

New clause 2, the consequential amendments and the Opposition amendments to schedule 20 are simply not necessary. New clause 2 seems to be intended to carve out special IHT treatment for trusts that are set up on divorce in relation to life insurance protection policies and for some disabled people. It starts by saying:

“The provisions of Schedule 20 shall not operate so as to discourage, impede or prevent the use of trusts which are set up”—

for those purposes. That prompts the question of who would judge whether the test was satisfied. There is no justification for special treatment for life insurance protection policies. The Government are not denying that insurance is important, we are merely saying that this particular asset does not require special provision in the tax regime for trusts.

Secondly, on relationship breakdown settlements, I can only repeat what I have said on previous occasions. HMRC is advised that trusts are rarely used in divorce cases, and their use is certainly not necessary. There has been some discussion of that this afternoon. Where they are used, the balance will often have been tipped by the additional IHT advantages that a trust can bring. I referred at the beginning of my remarks to the importance of tax neutrality as one of the issues that the Government were addressing here in relation to trusts.

Mrs. Villiers
Will the right hon. Lady acknowledge that if schedule 20 is agreed to, there will be an additional tax charge in divorce cases where a spouse is given the right to live in a house until the children finish their education, because either there will be a new IHT charge, if it is a trust, or there will be a new income tax or capital gains tax, if another mechanism is used?

Dawn Primarolo
We have crossed this ground before. The answer is no, because a charge against the property is often used to give protection in this situation. The hon. Lady puts the case for life policies in trust on the basis that they could give rapid access to cash with no need for probate, but I absolutely disagree with her because that can still be obtained by using trusts, in particular a bare trust.

Mrs. Villiers
On life insurance trusts, does the right hon. Lady stand by the statement made clearly in the guidelines issued by the Treasury on 7 April, and by the then Chief Secretary on Second Reading, that no life insurance policies written in trust before 22 March will be affected by schedule 20 charges—not one?

Dawn Primarolo
We covered that in Committee as well. I have made the position on insurance policies quite clear and the statements to the House have been correct.

On the hon. Lady’s final point with regard to trusts for disabled persons, the Opposition seek again to operate the rules by reference to the Mental Capacity Act 2005 and to extend eligibility to those entitled to the lower components of disability living allowance. I have explained why the Government consider the existing definition, based on that Act, to be more appropriate, and that was supported by the vast majority of respondents to a recent consultation. It is also easy to administer. I have set out the case for not casting the eligibility criteria so wide as to include people who do not require a privileged trust to manage their financial affairs.

Let me deal first with the Mental Capacity Act. First, it is not yet in force and would mean a delay in the introduction of the provisions for disabled trusts. Opposition Members may think that that is desirable; I do not. In any case, it is a mistake to think that that Act will deliver a ready-made answer to the question that matters for IHT purposes. Capacity under the Act is not an all-or-nothing issue. A person may lack capacity for dealing with some matters while remaining quite capable of dealing with other aspects of their life. Any order under the Act will intervene in the person’s affairs only to tell them what should happen.

The Opposition have also made the point that the consultation on the trust modernisation is not relevant to this point. That consultation dealt specifically with the question of catering for mental as well as physical incapacity, and was deliberately focused on cases where the disabled person faces substantial difficulties in handling their financial affairs. The measure was not intended as a relief for disability, and as such there is no justification for extending the definition.

Mrs. Villiers
The Paymaster General has repeatedly referred to the consultation that she carried out on the definition of disability. I have the summary of the responses and it says:

“some groups representing the disabled questioned whether this” —

the definition—

“was too narrow, suggesting that, amongst other things, the definition used in the Disability Discrimination Act 1995 should be used instead.”

They did express their concerns.

Dawn Primarolo
Yes, some did, and I shall go on to make the points for the hon. Lady. This is a difficult area of legislation and there is not unanimity among all the groups. I concede that point, and I have always conceded it. We are concerned with the majority. If the Government undertake a consultation and refuse to go with the majority on the basis that some now have a different view, or at the time had a different view, it makes it impossible to deal with any legislation in this area. The Department undertook extensive consultation with charities and groups representing the disabled when arriving at the definition of disability for income tax and capital gains tax purposes.

Julia Goldsworthy
Will the right hon. Lady give way?

Dawn Primarolo
I will give way in a moment.

Those that participated were Contact a Family, the Council for Disabled Children, the Disability Alliance, Mencap, the Thalidomide Trust, Barnardo’s, Scope, the Disability Rights Commissioner and the Family Fund.

Mrs. Villiers
Will the right hon. Lady give way?

Dawn Primarolo
No, I shall finish this point and then I will give way on the disability point.

The Council for Disabled Children represents a long list of organisations, which I do not have time to read into the record because the House needs to move on.

Mrs. Villiers
Will the right hon. Lady give way?

Dawn Primarolo
If the hon. Lady will let me make this point, I will give way to her. I have already said that.

That list includes organisations such as the Association of Directors of Social Services, the Royal College of Nursing, the Parents Autism Campaign for Education, the National Children’s Bureau, Children in Scotland, and the Children’s Trust. It also included the National Autistic Society, which I understand has since developed its view and now has a slightly different view, and is, along with Mind and the Parkinson’s Disease Society, a signatory to a letter saying that its views have moved on. But the rest have not. I have repeatedly asked my officials whether the Department has had formal representations on this matter. Apart from the circular to members of the Committee, I cannot find any reference to these organisations wanting to come back again on this.

The point here is that this is a difficult area and it will always be. When any Government settle on a definition, they do so after consultation and understanding what the majority have said, and, in fairness, reflecting in their response where a different view was taken and why.

I said that I would give way to the hon. Member for Falmouth and Camborne and then I will give way to the hon. Member for Chipping Barnet.

Julia Goldsworthy
I thank the right hon. Lady for giving way. I wish to make a point about mental health organisations that represent people with fluctuating conditions. In my speech, I mentioned that people with fluctuating conditions might have capacity at some points and that at other points they might not. It is a fluctuating capacity—that is the definition—so although such people might have capacity at certain times, they are likely to become ill again. What representations did the Minister receive in the consultation that she refers to?

18:00:00

Dawn Primarolo
We dealt with fluctuating conditions in Committee, and I made it absolutely clear to the hon. Lady then what would happen in such circumstances. If she cannot remember that, I cannot help her, but I will send her the reference.

Mrs. Villiers
The right hon. Lady said that she wished to have evidence of representations having been made to the Treasury on the definition of disability. I refer her to a document I have in my hand, “Response to Inland Revenue proposals: modernising the tax system for trusts” by the Disability Alliance, which is one of the organisations that the Paymaster General recently cited as supporting her definition. It states:

“The proposals to restrict eligibility to those mentioned in paragraph 2 above—”

where it refers to the definition in question—

“appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government’s proposal of fairness.”

The Disability Alliance has expressed concern, and so have a number of other organisations, as set out in documents that I have in my possession.

Dawn Primarolo
The hon. Lady continues to demonstrate her lack of understanding of the complexity of the consultation with regard to definitions of disability, the range of organisations that took part in it, and my acknowledgement that some of those organisations—some of them—did not take the same view as us, and that some organisations have continued to advance their view. Their views are not ignored, but the Government have to take a reasonable decision. Having changed a regime only two years ago on the basis of what the majority wanted, it is not reasonable to change it yet again—especially as the Opposition go on so much about certainty—on the basis of the views of certain individuals.

I have dealt with the amendments in this group. I have explained to the hon. Lady about those of her amendments that I do not accept as they would fundamentally undermine the Government’s objectives, and I have also explained about amendments of a similar nature to some of hers that the Government have tabled in order to deal with some of the points that Committee members thought should be looked at further.

What this debate has made clear is that Opposition Members want to strike down inheritance tax. The hon. Lady was not prepared to make a commitment today on whether it will be abolished if her party ever get elected, but she has confirmed that her party is considering abolishing it. It beggars belief that she has the audacity to stand before this House and say that the vulnerable will be attacked, when that is not true, and that the principle in question is being undermined, when that is not true, and then to say that at one fell swoop billions of pounds will be wiped off public expenditure, so that that money cannot be spent on services for such vulnerable people.

I commend the Government amendments to the House, and I call on my hon. Friends to oppose the Opposition amendments if they are pressed to a vote.

Mrs. Villiers
I thank Members for their contributions, and I emphasise that my party is not asking for special tax privileges for trusts. All we are saying is that the Government should not slap punitive new tax charges on trusts, the vast majority of which are set up for completely non tax-related reasons. They are set up to provide for family members—to provide security for families for the future—and we oppose the charges because they are an attack on prudent and responsible behaviour.

The Paymaster General persists with the misleading statement that the Government seek to align the tax treatment of trusts with mainstream treatment. That is simply not true; they seek to bring all trusts within the punitive regime that has existed for many years for discretionary trusts. The tax regime does not currently give special tax privileges for trusts; that is why they are not largely used for tax avoidance. We deny that we are seeking special privileges for trusts; we just wish to oppose the Government’s punitive new charges in this area.

The Paymaster General believed that there was no problem in relation to people changing their wills, and that few people would be affected. In that case, why has she tabled 50 amendments to her own schedule? The Paymaster General seemed to regret that I have made the same speech on a few occasions. The last time I made the speech it seemed to have an impact, because the Government promptly did what I asked them to do three weeks later through amendments in Committee.

The Paymaster General gave a long list of organisations that apparently support her position on the disability consultation, but they patently do not. I have given the House an example of an organisation that she listed but which expressed grave concern about the definition in question. It is my understanding that only six organisations that represent disabled groups responded to the consultation on this point and, as I have told the House, they expressed concerns.

The Paymaster General says that the Government cannot adopt the Opposition’s amendments because the Mental Capacity Act 2005 has not yet come into  effect. That is no barrier. We can incorporate a provision in that Act, even though it has not yet come into effect. If we incorporate it in the Inheritance Tax Act 1984 as a result of this Finance Bill it can happily take effect from the moment of Royal Assent.

The Paymaster General says that there is no justification for introducing special treatment for life insurance policies. Why then did she table amendments in Committee to give special treatment to life insurance policies? She also refused to answer my question about whether the then Chief Secretary was correct in saying to the House that no life insurance written into trust before Budget day would be affected by the schedule 20 changes. She refused to answer that question because that statement was not true then and is not true now.

The Paymaster General brushed aside my concerns about divorce by saying, “You don’t need trusts in divorce, as plenty of other mechanisms are available.” Frankly, those mechanisms are not available to people whose divorces are already concluded. They might have trusts already, and now, thanks to the Paymaster General, they face the deeply unpleasant prospect—both financially and emotionally—of going back to court to have their divorce settlements varied to try to resist the Government’s attempt to place new tax charges on divorce.

The Paymaster General also refused to be drawn on other alternatives on offer that perform a similar function to a trust in relation to a divorce—I acknowledge that—such as a charge or retaining legal ownership. Both those will involve a new tax charge, whether that is an additional income tax charge or a capital gains tax charge. In either case, unless the Opposition amendments are agreed to, there is the prospect that people who get divorced and wish to allow their spouse to live in a property until their children have completed their education will be paying new taxes, thanks to schedule 20.

We have emphasised throughout the debate the huge value that trusts provide to ordinary hard-working families. The Government’s proposals will hit not just the super-rich, but a whole range of people who have done nothing more criminal or irresponsible than to try to provide financial security for their families’ future, which is why I will press new clause 2 to a Division.

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

Division 272
04/07/2006 18:09:00
The House divided:
Ayes: 223
Noes: 277
Question accordingly negatived.

Schedule 20

Inheritance tax: rules for trusts etc

Amendments made: No. 70, page 384, line 38, at end insert—

‘(2) For the purposes of sections 71A to 71G above, a deceased individual (“D”) shall be taken to have been a parent of another individual (“Y”) if, immediately before D died, D had—

(a) parental responsibility for Y under the law of England and Wales,

(b) parental responsibilities in relation to Y under the law of Scotland, or

(c) parental responsibility for Y under the law of Northern Ireland.

(3) In subsection (2)(a) above “parental responsibility” has the same meaning as in the Children Act 1989.

(4) In subsection (2)(b) above “parental responsibilities” has the meaning given by section 1(3) of the Children (Scotland) Act 1995.

(5) In subsection (2)(c) above “parental responsibility” has the same meaning as in the Children (Northern Ireland) Order 1995.”.’.

No. 71, page 386, line 29, leave out ‘(“B”)’.

No. 72, page 386, line 30, leave out ‘(“the current interest”)’.

No. 73, page 386, line 33, leave out

‘the following conditions are met’

and insert

‘section 49BA or 49BB below so provides’.

No. 74, page 386, line 34, at end insert—

‘49BA  Transitional serial interest: interest to which person becomes entitled during period 22nd March 2006 to 5th April 2008

(1) Where a person (“B”) is beneficially entitled to an interest in possession in settled property (“the current interest”), that interest is a transitional serial interest for the purposes of this Chapter if the following conditions are met.’.

No. 75, page 387, line 6, at end insert—

‘49BB  Transitional serial interest: interest to which person becomes entitled on death of spouse or civil partner on or after 6th April 2008

(1) Where a person (“E”) is beneficially entitled to an interest in possession in settled property (“the successor interest”), that interest is a transitional serial interest for the purposes of this Chapter if the following conditions are met.

(2) Condition 1 is that—

(a) the settlement commenced before 22nd March 2006, and

(b) immediately before 22nd March 2006, the property then comprised in the settlement was property in which a person other than E was beneficially entitled to an interest in possession (“the previous interest”).

(3) Condition 2 is that the previous interest came to an end on or after 6th April 2008 on the death of that other person (“F”).

(4) Condition 3 is that, immediately before F died, F was the spouse or civil partner of E.

(5) Condition 4 is that E became beneficially entitled to the successor interest on F’s death.

(6) Condition 5 is that—

(a) section 71A below does not apply to the property in which the successor interest subsists, and

(b) the successor interest is not a disabled person’s interest.’.

No. 76, page 387, line 47, leave out ‘49B(1)(a)’ and insert ‘49BA’.

No. 77, page 388, line 4, leave out ‘49B(1)(a)’ and insert ‘49BA’.—[Dawn Primarolo.]

Amendment proposed: No. 5, page 388, line 18, at beginning insert—

‘6 (1) In section 89 (trusts for disabled persons)—

(a) in subsection (4)(a) at end insert—

“(aa) a person who lacked capacity within the meaning of section 272 below, or”;

(b) in subsection (4)(c), leave out “or middle” and insert “middle or lower”; and

(c) after subsection (4)(c) at end insert—

“(d) a person who satisfies the Commissioners for Her Majesty’s Revenue and Customs that he had a condition that it was at that time reasonable to expect would have such effects on him as to lead to him becoming a person—

(i) falling within subsection (4)(a) or (aa) above, or

(ii) in receipt of an attendance allowance mentioned in subsection (4)(b) above, or

(iii) in receipt of a disability living allowance mentioned in subsection (4)(c) above.”.’.—[Mrs. Villiers.]

Question put, That the amendment be made:—

Division 273
04/07/2006 18:26:00
The House divided:
Ayes: 215
Noes: 276
Question accordingly negatived.

Amendments made: No. 78, page 389, line 36,  leave out from ‘person’ to ‘on’ in line 37 and insert ‘becomes beneficially entitled’.

No. 79, page 392, line 10, leave out ‘or 89A’.

No. 80, page 396, line 14, at end insert—

‘(ab) a disabled person’s interest within section 89B(1)(c) or (d) below, or’.

No. 81, page 399, line 44,  after ‘interest,’ insert ‘or a disabled person’s interest within section 89B(1)(c) or (d) below’.

No. 82, page 400, line 42, leave out from ‘applies’ to end of line 44 and insert ‘—

(a) as though for “an interest in possession” in each place where that appears in subsection (1) above there were substituted “a postponing interest”, and

(b) as though, for the purposes of that subsection, each of the following were a “postponing interest”—

(i) an immediate post-death interest;

(ii) a disabled person’s interest.”.’.

No. 83, page 401, line 20, at end insert—

‘(ia) a disabled person’s interest within section 89B(1)(c) or (d) below, or’.

No. 84, page 401, line 27, after first ‘interest’ insert ‘, disabled person’s interest’.

No. 85, page 401, line 29, after ‘or’ insert ‘disabled person’s interest or’.

No. 86, page 401, line 37, leave out ‘neither’ and insert ‘—

(i) not’.

No. 87, page 401, line 37, leave out ‘nor’ and insert ‘,

(ii) not a disabled person’s interest within section 89B(1)(c) or (d) below, and

(iii) not’.

No. 88, page 403, line 7,  leave out ‘property comprised in the testator’s estate’ and insert ‘the property’.

No. 89, page 403, line 18, at end insert—

‘(5) Subsection (4) above also applies where—

(a) a person dies before 22nd March 2006,

(b) property comprised in the person’s estate immediately before his death is settled by his will,

(c) an event occurs—

(i) on or after 22nd March 2006, and

(ii) within the period of two years after the testator’s death,

that involves causing the property to be held on trusts within subsection (6) below,

(d) no immediate post-death interest, and no disabled person’s interest, subsisted in the property at any time in the period beginning with the testator’s death and ending immediately before the event, and

(e) no other interest in possession subsisted in the property at any time in the period beginning with the testator’s death and ending immediately before 22nd March 2006.

(6) Trusts are within this subsection if they would, had they in fact been established by the testator’s will and had the testator died at the time of the event mentioned in subsection (5)(c) above, have resulted in—

(a) an immediate post-death interest subsisting in the property, or

(b) section 71A or 71D above applying to the property.”.’.

No. 90, page 403, line 42,  after ‘if’ insert ‘—

(a)’.

No. 91, page 403, line 43, at end insert ‘, or

(b) the person dies under the age of 18 years and, immediately before the person’s death, section 71D of the Inheritance Tax Act 1984 (age 18-to-25 trusts) applies to the property in which the interest subsists.’.

No. 92, page 404, line 6, at end insert—

‘(iii) a disabled person’s interest within section 89B(1)(c) or (d) of that Act, or’.

No. 93, page 404, line 20,  leave out ‘(1B)’ and insert ‘(1B)(a)’.

No. 94, page 404, line 27,  after ‘if’ insert ‘—

(a)’.

No. 95, page 404, line 28, at end insert ‘, or

(b) the person dies under the age of 18 years and, immediately before the person’s death, section 71D of the Inheritance Tax Act 1984 (age 18-to-25 trusts) applies to the property in which the interest subsists.”.’.

No. 96, page 404, line 33, at end insert—

‘(db) by virtue of subsection (2) of section 71E of that Act (age 18-to-25 trusts) does not constitute an occasion on which inheritance tax is charged under that section,”.’.—[Dawn Primarolo.]

New Clause 3

Amendments to Finance Act 2004: Retirement Income Fund

‘(1) The Finance Act 2004 is amended as follows.

(2) In section 164 at end add “and

(g) payments into a Retirement Income Fund.”.

(3) In section 165 there is inserted in Pension rule 6 “or

(d) a withdrawal from a Retirement Income Fund.”.

(4) In section 165 after Pension rule 7 there is inserted—

“Pension Rule 8

Before a member makes a withdrawal from a Retirement Income Fund, he must buy a relevant linked annuity which is linked to the retail prices index, which pays an income equivalent to the Minimum Income Requirement.”.

(5) In Schedule 28 after paragraph 16C there is inserted—

“Retirement Income Fund

16D (1) Subject to subsections (2) and (3) of this section, a Retirement Income Fund is a vehicle for the reinvestment of savings in retirement, which—

(a) has been established by a person designated by subsection (1) of section 154; and

(b) is a vehicle by whose investments are—

(i) investments of a kind described in the Insurance Companies Regulations 1994, Schedule X, Part 1; or

(ii) approved by HM Revenue and Customs.

(2) Funds held in the Retirement Income Fund as referred to in subsection (1) may be withdrawn from the Retirement Income Fund by the member as and when he elects.

(3) A member may not invest in a Retirement Income Fund unless the requirements of Rule 8 of section 165 have been met.

(4) A Retirement Income Fund, and any income derived from it, must not be capable of assignment or surrender by the member.

(5) Any withdrawal from the Fund by the member under subsection (2) shall be assessable to tax under Schedule E (and section 203 shall apply accordingly) and shall be treated as earned income of the member.

Minimum Retirement Income

16E (1) The amount of Minimum Retirement Income shall be set for each financial year following consultation by the Chancellor of the Exchequer by order.

(2) An order under this section shall, in respect of each financial year after that in which this section comes into force, be made on or before 31st January preceding the year in question.

(3) An order under this section shall be made by statutory instrument and shall be subject to annulment in pursuance of a resolution of either House of Parliament.”.’.—[Mr. Hoban.]

Brought up, and read the First time.

Mr. Mark Hoban (Fareham) (Con)
I beg to move, That the clause be read a Second time.

Madam Deputy Speaker (Sylvia Heal)
With this it will be convenient to discuss the following:

New clause 7—Dependant’s Retirement Income Fund—

‘(1) The Finance Act 2004 is amended as follows:

(2) In Schedule 28 after paragraph 22 insert—

“22A Dependant’s retirement income fund

(1) Subject to subsections (2) and (3) of this section, a department’s retirement income fund is a vehicle for the reinvestment of savings in reitrement, which—

(a) has been established by a person designated by subsection (1) of section 154; and

(i) investments of a kind described in the Insurance Companies Regulations 1994, Schedule X, Part 1; or

(ii) approved by HM Revenue and Customs.

(2) Funds held in the retirement income fund as referred to in subsection (1) may be withdrawn from the retirement income fund by the members as and when he elects.

(3) A dependant may not invest in a dependant’s retirement income fund unless the requirements of Rule 8 of section 165 have been met.

(4) A retirement income fund, and any income derived from it, must not be capable of assignment or surrender by the member.

(5) Any withdrawal from the fund by the member under subsection (2) shall be assessable to tax under Schedule E (and section 203 shall apply accordingly) and shall be treated as earned income of the member.”.’.

Amendment No. 62, in clause 159, page 135, line 7 , leave out ‘and (4)’ and insert ‘, (4) and (7)’.

Amendment No. 14, page 135, line 34, at end insert—

‘(7) The Treasury may make regulations about the application of subparagraph (2) of this section which will be deemed to take effect from 6th April 2006.’.

Amendment No. 107, schedule 22, in page 451, line 26,  after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 108, page 451, line 28, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 109, page 451, line 38, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 110, page 452, line 6, after ‘pension’, insert ‘and retirement income fund’.

Amendment No. 111, page 452, line 29, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 112, page 452, line 35, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 113, page 452, line 40, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 114, page 453, line 4, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 115, page 453, line 10, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 116, page 453, line 29, at end insert—

“dependent’s retirement income fund” has the meaning given by paragraph 22A of that Schedule’.

Amendment No. 117, page 453, line 40, at end insert—

“‘retirement income fund” has the same meaning as in paragraph 16D of that Schedule.’.

Amendment No. 118, page 453, line 44, after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 119, page 454, line 6,  after ‘fund’, insert ‘and retirement income fund’.

Amendment No. 120, page 454, line 20,  at end insert—

“‘dependant’s retirement income fund” has the meaning given by paragraph 22A of that Schedule’.

Government amendments Nos. 31 and 97.

Mr. Hoban
I should like to break down my remarks into two sections. The first deals with new clauses 3 and 7 and amendments Nos. 107 to 120 and the second covers amendments Nos. 62 and 14.

Hon. Members will remember debates about scrapping the rules that require the compulsory purchase of annuities at 75. We are holding our first debate on the topic since the Government modified the requirement in the Finance Act 2004. The argument that underpins new clauses 3 and 7 and amendments Nos. 107 to 120 is that the Government have created a framework through the 2004 Act and the Bill that could give people much wider choice for retirement income planning through the introduction of the alternatively secured pension and the creation of an inheritance tax regime for left-over funds. Having accepted that, I contend that the Government should create more choice for people in retirement and more certainty for the state by introducing a further alternative to annuitisation and the alternatively secured pension—the retirement income fund, which is the subject of the new clause.

The issue of compulsory purchase of annuities has been rumbling on for some time and was a topic of debate through private Members’ Bills. My hon. and learned Friend the Member for Harborough (Mr. Garnier), my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) and the former Member for Taunton all sought to address the matter through private Members’ Bills. My hon. Friend the Member for Eastbourne (Mr. Waterson) also raised it in discussions on the Pensions Bill and my hon. Friend the Member for Tatton (Mr. Osborne) did so in the Committee and Report stages of the Finance Act 2004.

It is remarkable that, having doggedly defended compulsory annuitisation throughout the debates on the private Members’ Bills and the passage of the Finance Act 2004, the Government in a sense modified the principle of compulsory annuitisation in that Act. The Act and the Bill that we are considering create an architecture for an alternative to compulsory annuitisation.

The 2004 Act introduced the concept of the alternatively secured pension, a mechanism that enabled the Plymouth Brethren to draw pensions that were not linked to annuities. They have well-known objections to annuities and required an alternative mechanism to establish a means of funding their retirement after the age of 75—the age at which an annuity has to be purchased. The Act enabled them to draw down a proportion of their pension fund after the age of 75, in line with specific rules, which I shall not go through in detail.

Rob Marris
Go on.

Mr. Hoban
I shall not do that, despite the hon. Gentleman’s tempting me to do so. However, the rules have an important bearing on some points that I want to make.

It is fundamental to appreciate that, in the 2004 Act, the Government accepted that there is no requirement for the annuitisation of the pension fund of a group of people at 75. Anyone who wants to go down that route can do so. The Government have, therefore, through the 2004 Act, removed an argument for compulsory annuitisation.

The new clause creates an alternative to the alternatively secured pension, which sets a maximum draw-down that ensures that people do not run out of funds during their retirement. It would minimise the chances of those with alternatively secured pensions becoming reliant on the state. It would not entirely prevent that, but it would minimise the chances by ensuring that there was always something left in the alternatively secured pension on which people could draw later in life.

The new clause would also minimise the chances of people becoming reliant on the state by requiring them to buy an annuity that delivered a minimum income. The Chancellor of the Exchequer would set the amount and, once it was purchased, it would enable people to draw down the rest of the funds as they saw fit, as they can do now before the age of 75. The new clause therefore sets out the minimum income requirement, the amount of which would be set by the Chancellor annually, to ensure that people do not become reliant on the state in their retirement, but that they have the flexibility to determine how the remainder of their pension fund should be used.

Steve Webb (Northavon) (LD)
The hon. Gentleman has given a clear exposition. He suggests that the Chancellor of the Exchequer would set the same minimum income figure for everybody. However, if I have a pension pot and some other source of income, which already gets me clear of means-tested benefits, there is no reason why the minimum income for me should not be zero, because I will not need means-tested benefits even if I blow the entire pot. Should not the figure be specific to individuals?

18:45:00

Mr. Hoban
The hon. Gentleman makes an important point. It is difficult to legislate on such matters. The minimum retirement income is aimed to achieve, in time, the right amount of income to be purchased for the rest of people’s lives. In circumstances in which a person’s income might fluctuate, the minimum will fluctuate over the course of that person’s retirement. We are considering a floor for use in later life. The subject is complex, and I am the first to acknowledge that. The process is not entirely straightforward but we should explore it to ensure some flexibility in the way in which people can use their retirement funds.

It is worth considering the views of the Turner commission on annuitisation. Its report highlighted the strains that the move to defined contribution schemes would place on the annuity market. It asks whether there are any limits to the capacity of the annuity market to play a greatly expanded role in post-retirement longevity risk absorption, as the state exits from pay-as-you-go earnings-related pension provision, and as private pension provision shifts from defined benefit to defined contribution. It therefore asked whether there would be a sufficient supply of annuities for people to acquire to enable them to achieve certainty about their income throughout their retirement.

Two points emerge from that analysis. First, the shorter the period of the annuity, the lower the inherent risk, the lower the risk premium priced in the product and, therefore, the higher the income that people can secure for their retirement. That is an argument for later annuitisation. The commission contends that policies need to be in place to encourage later annuitisation. One policy option is the proposal  that the requirement for annuitisation at any age should be limited. That is similar to the proposal in the new clause. The report states:

“The Pension Commission is not convinced by the arguments that annuitisation requirements should be waived entirely. Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive, is to ensure that people make adequate provision, it is reasonable to require that pension savings are turned into regular pension income at some time. But this objective could be pursued via requiring annuitisation up to some defined level of income. And tax relief given on contributions can be reclaimed via the tax treatment of pension funds at point of inheritance or drawdown. While only a minority of people would use this freedom, anything which removes demand from the annuity market will at the margin improve ease of supply and pricing for others.”

The Turner commission highlighted two matters that are vital to our debate. First, it supports the idea of minimum annuitisation, reflecting the provision for the minimum income requirement in the new clause. Secondly, it tackles head-on one of the arguments that the Government have used persistently—the fact that the measures will directly benefit only a minority. Yes, that may well be the case, but that relieves the pressure on the annuity market and, indirectly, helps the remaining population, who wish to buy annuities.

It is therefore short-sighted of the Government to reject the Turner report’s approach.

Rob Marris
What does the hon. Gentleman believe that the minimum retirement income should be? How much?

Mr. Hoban
I shall not go down that route. As was debated during consideration of the private Members’ Bills—the issue has been debated in depth— several factors should be borne in mind. I am trying to emphasise that an alternative to the current arrangement could give people a wider choice in retirement. The minimum retirement income should be enough to ensure that people are not a burden on the state.

The outstanding issue from the Finance Act 2004 is the tax treatment of left-over funds. It is an inevitable consequence of the structure of alternatively secured pensions that there will be left-over funds, because the rules set a ceiling on the amount that can be withdrawn from the pension. It is therefore inevitable that, on death, the member will leave some left-over funds. That likelihood was mentioned in our deliberations on the Finance Bill in 2004, when the then Financial Secretary to the Treasury, the right hon. Member for Bolton, West (Ruth Kelly), said:

“We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system.”—[Official Report, Standing Committee A, 8 June 2004; c. 485.]

Since that debate in 2004, a tax treatment has been introduced for the left-over funds in alternatively secured pensions that prevents them from being passed between generations tax-free and therefore achieves the goal set out in 2004 of preserving the integrity of the tax system. In new clause 7 and amendments Nos. 107 to 120, we are seeking to mirror that provision for the left-over funds in retirement income funds, so that they can be taxed in the same way as the left-over funds in an alternatively secured pension, and so that, when the funds pass to the spouse and dependents, inheritance tax would be paid.

We had a discussion in Committee about the interaction between income tax and inheritance tax. For the purposes of this debate, although we accept the position that the Government outlined in Committee, we would point out that tax rules are now in place to tackle the transfer of wealth from generation to generation, and that those same rules could be applied to retirement income funds.

The Government have now created the architecture to enable more people to opt out of compulsory annuitisation, through the introduction of alternatively secured pensions in the Finance Act 2004 and the inheritance tax regime in the Finance Bill. I do not wish to rehearse the arguments about why it is appropriate to end compulsory annuitisation, nor do I think that the Government will rush to accept the new clauses and amendments, but the fact that they have given way on the principle of compulsory annuitisation through the introduction of alternatively secured pensions creates a window of opportunity for them to think again.

I know that, in the pensions White Paper, the Government rejected some of the ideas from the Turner commission on changes to the annuities market, but they will have to monitor the appetite of the market for alternatively secured pensions, following A-day and the introduction of the new inheritance tax regime. They will need to respond to the pressures from the market for an alternative to the annuitisation of pensions at the age of 75.

For the benefit of those Members who did not participate in the Standing Committee, amendments Nos. 62 and 14 relate to the rules on the recycling of lump sums in clause 159. In Committee, I expressed concern that the clause could be applied broadly, as it seeks to capture circumstances in which people pay significantly higher pension premiums in the knowledge that they will receive a higher lump sum. That opportunity has been available for some time, but it is only since the simplification of pensions after A-day that this has become an issue, because of the relaxation of the contribution cap and the facility for pension scheme members to withdraw a lump sum without drawing a full pension.

The Government’s principal concern was what the Economic Secretary referred to as “turbo-charging”. The example that he used in Committee was of someone who withdrew a cash lump sum from their pension, reinvested it in another scheme, obtained 40 per cent. tax relief on that reinvestment, withdrew 25 per cent. of the amount invested as a lump sum, reinvested that 25 per cent. in another scheme, obtained a further batch of tax relief at 40 per cent., withdrew 25 per cent. of that amount—and so the cycle would continue as the contributions were recycled.

Clause 159 would stop the abuse of that mechanism, but it could also capture a series of legitimate pre-retirement tax planning arrangements. However, to limit the scope of this rather brief clause, Her Majesty’s Revenue and Customs has produced a significant quantity of guidance notes—28 pages containing 21 different examples of how the rules apply—to clarify its remit. The rules are complex, and some industry experts have expressed their concern about that. The Institute of Chartered Accountants of England and Wales has said that

“the rule will apply only if ‘the member envisaged at the relevant time that that would be so’. This is a highly unusual and unclear phrase and is not used in the guidance, which refers to ‘pre-planned’. We think it should be redrafted to make it clear that at the time the lump sum was paid, it was the intention of the taxpayer to use all or part of the lump sum to fund additional contributions.”

I will come back to the use of the word “envisaged” later, so as to recapture the spirit of our debate in Committee.

Rachel Vahey of Scottish Widows has said:

“Advisers and providers may both have a role to play. Advisers will need to make sure through factfinds that the contribution does not come from a tax-free cash sum. Providers cannot be expected to know where contributions come from. In practical terms, picking out exactly which income stream is the source for a pension contribution could be problematic for affluent clients phasing in their retirement. There is a real danger that the anti-avoidance rule to be inserted into Finance Bill 2006 to stop this practice will be overly onerous and, in the end, create more problems than it solves.”

She has also said that the rules are worrying as they seem to be very complicated—which is what had been feared—particularly as all the examples show how difficult it is to calculate whether contributions have increased significantly. She points out that, as it is up to the scheme administrator to apply the charge to the member if they own up to recycling tax-free cash, any charge that the administrator incurs may also be passed on to the individual, which could leave the member with a charge equivalent to about 70 per cent. of the tax-free lump sum.

Rachel Vahey added:

“After putting all these rules in place, it will be very difficult to police. Providers will probably have to change application forms to ask about pre-planning as a part of recycling, and if someone does recycle after denying it on a form, can providers go back to HMRC and say it’s not our fault because we asked for a declaration, in order to avoid an administrator’s charge?”

Her conclusion about the Government was:

“The approach they’ve taken is using a sledgehammer to crack a nut.”

Iain Oliver, the head of pensions at Norwich Union, has said:

“HMRC’s approach is inconsistent with the aims of simplification. We urge them to fundamentally rethink their approach to prevent unnecessary complication to the retirement and financial advice approach”.

He also said that recycling pension contributions—by taking a tax-free lump sum and reinvesting it to obtain tax relief and a further lump sum—could perhaps be prevented by changes to the self-assessment form or by ruling out its promotion in the Financial Services Authority’s code of business rules. He went on to say that HMRC’s latest guidance would mean additional paperwork for clients to read and a penalty charge of 55 per cent. on lump sums paid.

John Lawson, the head of pensions policy at Standard Life, has said that the proposals will be unworkable because the reporting requirements will  fall on the individual taxpayer, creating the strong possibility that they will make mistakes or overlook parts of the guidance. He said:

“It’s just incredible, and mind-numbingly complex. I don’t think people will be able to get to grips with it. I don’t think they can be serious. They’ve come up with probably their best fist of it, but there’s no way it’s workable.”

Lawson also asks how the Revenue will prove that people are pre-planning the recycling of tax-free cash, saying:

“In order for the rule to apply, it has to be pre-meditated, but how do you prove it—how are the Revenue going to read your mind? The only way is to assume guilt in every case, which is a bit harsh”.

That is an understatement.

7 pm

I am afraid that anyone seeking clarity on the interaction of those elements from the proceedings in the Committee will end up confused. The Economic Secretary waxed philosophical in Committee. In a Committee stage that had previously been characterised by arguments based on law and accountancy, that was the first debate that drew on the works of the American philosopher Donald Davidson, whose work “Actions, Reasons and Causes” was on the Economic Secretary’s reading list and clearly influenced the debate on the word “envisaged”. During an exchange on what is now sub-paragraph (2)(b) of new schedule 3A, the Economic Secretary said

“Envisaging is a broader term; it might be an intention on behalf of someone else, rather than a personal intention. ‘Envisaging’ may mean opening up the possibility that someone else may use the provision—in this case, to recycle the lump sum on that date. If ‘envisaging’ were used, that case would be caught. The difference between ‘envisaged’ and ‘intended’ is subtle but essential. ‘Envisage’ will cover the concept of intention, as sought by the amendment, and will go a little wider, so as to ensure that we catch all necessary cases.”—[Official Report, Standing Committee A, 20 June 2006; c. 743.]

The Institute of Chartered Accountants has said of the word “envisaged”:

“This is… highly unusual and unclear”.

My goodness! That exchange, and those surrounding it, certainly demonstrated that.

Before the debate, I took the opportunity to find out a bit more about Professor Davidson. He wrote copiously about natural semantics, something with which I suspect the Economic Secretary is familiar. Perhaps he has used natural semantics himself at various times in his professional career, both inside and outside the House.

Mr. Paul Goodman (Wycombe) (Con)
What about neo-endogenous growth theory?

Hon. Members
Post-neo-classical!

Mr. Hoban
Was it “neo-classical post-endogenous growth cycle”, or a combination of those words in no particular order?

I consulted Professor Davidson’s biography to see whether he had written anything about economics, but he had refrained from doing so, dealing entirely with semantics, causes and actions.

Madam Deputy Speaker
Order. I have allowed some relaxation of the strict rules of debate, but I think that now we are straying a little wide of the new clause.

Mr. John Gummer (Suffolk, Coastal) (Con)
Will my hon. Friend give way? I may be able to help him to return to the new clause.

Mr. Hoban
I give way to my right hon. Friend.

Mr. Gummer
Will my hon. Friend again explain to the Minister that once tax law is complicated to the extent that it is beyond the ken of ordinary people, they cease to believe in its fairness? There is a fundamental problem with the kind of complication with which he has delighted us today. It is not reasonable to make people expect their affairs to be so complicated that they require the kind of advice that is available only to the very richest.

Mr. Hoban
I am grateful to my right hon. Friend for putting me back on track—as, indeed, did you, Madam Deputy Speaker. He has made an important point. We are asking taxpayers to examine the rules carefully, and to draw their own conclusions about whether they may be recycling lump sums. The amounts involved are relatively small: they may be as little as 1 per cent. of a person’s lifetime allowance, which is £15,000.

Rob Marris
rose—

Mr. Hoban
The hon. Gentleman must realise that a number of people will build up £60,000 in their pension funds, and £15,000 is 25 per cent. of that. People with pension funds of that size will not be in a financial position to seek the expertise of members of the Institute of Chartered Accountants, such as myself, or lawyers or pension advisers. There is a real issue here: to what extent will people be able to interpret the Bill and the fairly detailed explanatory notes, and reach their own conclusions?

What will ultimately dissuade those people is the threat of having to pay 55 per cent. of the lump sum as a penalty. People who might otherwise wish to embark on sensible pre-retirement planning may find it difficult. We should also bear in mind that the pension contribution that is required to trigger the charges is only 30 per cent. of £15,000—£4,500. Relatively small sums could have an impact on someone’s overall pension. I believe that the law should be clear and straightforward so that people can understand, and that there should be some certainty.

The Economic Secretary to the Treasury (Ed Balls)
rose—

Mr. Hoban
I shall explain in a moment how we might provide that certainty, but I think the Economic Secretary wants to “envisage” something first.

Ed Balls
I shall resist the temptation to return to past debates. I merely wanted to give some reassurance to the hon. Gentleman and the right hon. Member for Suffolk, Coastal (Mr. Gummer). The hon. Gentleman quoted a number of advisers who may or may not have been involved in the marketing of these schemes. May I give him a quotation from the Chartered Institute of Taxation, which may provide some reassurance?

“The PBR announced changes in the pension rules to prevent recycling of pension funds. CIOT was worried lest the ordinary taxpayer, with no tax avoidance motive, would be inadvertently caught, and wrote to HMRC setting out these concerns. HMRC were receptive to these comments and took them into account when drafting the proposed legislation and guidance. We believe the resulting provisions are workable and should prevent marketed avoidance without catching the innocent.”

I hope that that does provide some reassurance. This is well-made policy, which means that the innocent will not be caught, but those who are paying large amounts for tax avoidance purposes will.

Mr. Hoban
I am grateful for the quotation. I shall consider the issue of certainty in a moment.

Rob Marris
rose—

Mr. Hoban
The hon. Gentleman seems to be hovering on the verge of an intervention. Does he wish to intervene again?

Rob Marris
I am grateful to the hon. Gentleman for his generosity. Perhaps I am not understanding him correctly: I cannot see what is so complicated about knowing whether one has reinvested a lump sum from a pension scheme, returning it to the pension scheme.

Mr. Hoban
If it is so clear, why are 21 examples and 28 pages of guidance necessary? However, let me take up something that the Economic Secretary said. Clause 159 is quite short and has a broad application, but its impact is mitigated by the 28 pages of guidance, which are very clear.

Ed Balls
Let me give the hon. Gentleman some further reassurance. We have debated the issue before, and I shall return to it shortly, but let me give him a second quotation from the Chartered Institute of Taxation:

“HMRC have consulted effectively on these changes; the resulting rules seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments, while the guidance includes a lot of excellent worked examples”.

In fact, there are almost 28 pages of them. It is the volume of those worked examples that means that the guidance is fit for purpose. The hon. Gentleman ought to praise us for being so open and transparent in our efforts to help people, rather than criticising us.

Mr. Hoban
What the Economic Secretary has said demonstrates why the position is not as clear as the hon. Member for Wolverhampton, South-West suggested.

Let me now deal with an issue that relates to amendments Nos. 62 and 14. The Chartered Institute of Taxation said that it was happy with both the clause and the guidance notes. The clause will remain on the  statute book if the Bill is given its Third Reading tomorrow, but the guidance notes will not be on the statute book. HMRC can alter them.

My point is that there should be more certainty and more clarity about the tax regime. That is why the amending provisions propose that the Treasury be given regulation-making powers to set out the application of sub-paragraph (2) in order to create that certainty. The issues covered in the guidance notes would then be on the statute book through secondary legislation, so they could not suddenly disappear or be changed overnight without proper parliamentary scrutiny. Revenue and Customs and the Treasury would then be forced to produce clear, watertight wording rather than use 21 examples to clear up the scope and application of clause 159. It provides a way of moving from abstract philosophical treatises to the concrete reality of law and regulation. We would also be able to revisit the guidance when it changes as the statutory instruments would need to be amended.

I was grateful to the Economic Secretary in Committee when he made a kind offer, namely, that if significant material changes were made in the guidance, he would ensure that they were circulated to the Opposition so that we would have a chance to comment upon them. He said that he would take advice to ensure that the Government continued to take a consultative approach to guidance issues. I am flattered, as would be my successor, to be given the opportunity to comment at some point when the guidance changes, but rather than leaving it to a single Member to comment, it would be preferable if the Committee had the opportunity to question the regulations. My proposals are an attempt to achieve some clarity, consistency and parliamentary scrutiny to ensure that the guidance notes, which are such an integral part of the application of clause 159, achieve a degree of security and certainty. It is an important matter and I conclude my remarks on that point.

Mr. Dunne
I shall make a couple of brief observations in support of new clause 3, proposed by my hon. Friend the Member for Fareham (Mr. Hoban). His concluding comments about the need for consistency and clarity were well made. We are entering a new era for pensions in this country. Following the introduction of A-day, individuals now have the opportunity to accumulate substantial pensions—[Interruption.] Before the hon. Member for Wolverhampton, South-West (Rob Marris) invites me to declare an interest, I will maintain my consistent and clear conduct before the House by declaring that I will be the beneficiary in due course of a personal pension and I am also a member, like everyone else in the House, of the parliamentary pension scheme. I declare that fully for the record.

The introduction of the new regime under A-day means that, at the upper end of the pension market, a decision needs to be taken by individuals who are considering whether to add to their pension funds over the coming years. The decision means setting aside potentially significant amounts of money—up to £200,000 in the current year. On my parliamentary salary, it is unlikely for me, but it applies to those who have sufficient income. They have to decide whether or not it is an appropriate repository for their funds.

The Government need to deal with the logical inconsistency of having established the alternative secured pension structure, but allowing some individuals not to have to take out an annuity at the age of 75, while others do. If the Government are paying attention, they need to reflect on whether to relax the compulsory annuitisation regime and allow individuals, on reaching 75, to withdraw income and thereby suffer income tax and, if these people were to die with large residual amounts in their pension fund, whether those amounts should form part of the estate and be taxed under the inheritance tax regime. That would an entirely logical and consistent approach to these larger individual pension amounts and would in no way conflict with the objectives of the Turner commission and subsequent White Paper.

19:15:00

I remind Ministers that the White Paper addresses the part of the population that has little prospect of paying inheritance tax and encourages saving among those earning up to £32,000 a year. Such individuals are unlikely to be able to accumulate sufficient assets over their lifetimes to get into the inheritance tax net, which is an objective of the rules on annuitisation. The Government need to look into that as a means of refining the White Paper, which I would greatly welcome. Like my hon. Friend the Member for Fareham, I do not anticipate that the Government will accept the new clauses, but they need to reflect on these issues as the White Paper becomes an Act over the next year. By next year, I expect the Government to have reflected on these provisions and to introduce them into the Budget.

Rob Marris
What does the hon. Gentleman believe the minimum retirement income should be, as specified in new clause 3?

Mr. Dunne
I am not a statistician or an actuary, so I cannot foresee the right amount, but I suspect that it should be close to the level that would take people out of means-testing. That would be the principle to apply, but I cannot tell the hon. Gentleman exactly how many pounds the amount should be. The hon. Member for Wolverhampton, South-West managed to intervene, just as I concluded my remarks.

Julia Goldsworthy
The Conservative new clause 3 provides an alternative to the current position, whereby people are forced to buy an annuity with their pension funds when they reach 75. The Conservatives have made that proposal before, most notably through the private Member’s Bill of the hon. and learned Member for Harborough (Mr. Garnier) in 2002. As the hon. Member for Fareham (Mr. Hoban) said, the issue was raised more recently in connection with the Finance Act 2004 and the Pensions Act 2004.

I draw the House’s attention to the ping-pong with the other place at the later stages of the Pensions Bill. This very matter was one of the most significant issues debated and it was the collapse of the Conservative vote in the House of Lords that prevented the opportunity of the provision being written on to the statute books. If the Conservative peers had been able to vote, perhaps we would not be debating the matter now.

The new clause is designed to limit the requirement to purchase an annuity to the amount that would give the annuitant a minimum retirement income, and it would provide greater flexibility over the remaining residual fund. That contrasts with the current situation in which 75 per cent. of the funds from a money purchase pension must be used to purchase an annuity by the age of 75. Since the scheme was set up, life expectancy has increased considerably, which alone might provide the Government with a reason to look into the matter again. The new clause would amend the Finance Act 2004, set up a retirement income fund and create a rule whereby withdrawals cannot be made unless the individual has purchased a relevant annuity that is linked to the retail prices index.

The hon. Member for Fareham will know that the Liberal Democrats have supported the approach in principle in the past and we do not intend to change our minds today—we will still be on the side of the angels. However, I have one query about the drafting of the new clause in respect of an issue that my hon. Friend the Member for Northavon (Steve Webb) has mentioned.

The principle behind the minimum retirement income is that it exists to prevent individuals from withdrawing all their money from their pension and falling on to state benefits. The annuity that would need to be purchased under new clause 3 would prevent that from happening, but in terms of qualifying for state benefits, all income is taken into account, not just the income from the annuity. The hon. Member for Fareham assumed that my hon. Friend the Member for Northavon was talking about fluctuating income, but it could affect someone with a steady income close to the minimum income. If they were below it, they would fall on to state benefits. However, under the provision, all the money in the pension pot would need to go into the annuity to provide a minimum income that, together with their other income, might take them significantly above the minimum income requirement in the new clause. I hope that the hon. Member for Fareham will clarify the operation of the new clause in that respect.

Finally, I have a question for the Economic Secretary. The Secretary of State for Work and Pensions promised a review of the pensions situation following the Turner report. When might we see that?

Steve Webb
I want to make a brief contribution. These days, I follow health matters, but when I saw that annuities were to be debated today I could not resist one last bash.

I am sure that our new Economic Secretary, who studied philosophy, politics and economics at Oxford, will be familiar with the concept of a Pareto improvement—that it is possible to act in such a way that no one is worse off, but someone is better off. In economics, of course, that is highly desirable. The reform of annuity law is a Pareto improvement—what these days we would call a win-win situation. No one loses if we can reform annuities in a way that gives people choices, at no cost to the taxpayer. As has been noted, the implications for means-tested benefit expenditure and the possible loss of tax revenue are the two areas of worry in terms of cost to the taxpayer.

New clause 3 is rather excessive in its attempts to deal with the risk falling on means-tested benefits. It is too prescriptive because, as I said in an earlier intervention, some people might be able to draw down their entire pension pot and still not run any risk of falling within the realm of means-tested benefits. However, new clause 3 would oblige them to buy an index-linked annuity of a certain value. The official Opposition do not know how much that would be, even though they want us to support the new clause, but that proposal is unnecessary and unduly restrictive.

We understand that there has to be a fail-safe—and I believe that it should be individual-specific—to ensure that a person’s pension pot is not raided to such an extent that he or she falls at the mercy of means-tested benefits. However, I have always believed that the Treasury always gets its tax money anyway. For example, tax is paid when a pension pot is drawn down, and also when people leave money when they die.

The Treasury’s ideological line is to convince us that tax relief is some sort of incentive. By and large, with the exception of what happens with the lump sum, tax relief is about taxing things once rather than twice. Our tax regime gives tax exemption on the way in and levies tax on the way out, but that is no reason to say that any change would undermine the incentive purpose of tax relief. Pension tax relief is about avoiding double taxation, not about incentives.

As long as the tax is paid at the end in some way, why should the Treasury care how it is paid? It could be paid as a charge on the un-annuitised fund at death, or on the pension that is eventually drawn at the end. It could be also be paid on the money drawn out while a person remains alive, but the Treasury will always get its tax, so who loses?

New clause 3 is unduly cautious, although the hon. Member for Fareham (Mr. Hoban) noted that the Government have given ground in response to the concerns expressed by the Plymouth Brethren. However, society always benefits when people in their old age are given new choices about their income. It is true that we are talking here about those who are better off, but that is no problem for the new Liberal Democrat party. Giving people choices is all part of our new approach. We approve of new freedoms for people on higher incomes to make choices.

The new clause would give a limited number of people new choices, at no cost to the Exchequer. I cannot see why a reasonable man such as the Economic Secretary would not be persuaded by that argument.

Ed Balls
I am pleased to respond to the debate, and to have an opportunity to restate the Government’s policy on annuities. However, I shall first answer the point made by the hon. Member for Northavon (Steve Webb). I shall resist all temptation to stray on to the philosophy of Mr. Davidson or the economics of Mr. Pareto. The hon. Gentleman defined a Pareto improvement as something that left no one worse off and a number of people better off, which sounds to me like the definition of a Labour Government.

We estimate that the cost of the new clause would be around £100 million. It is certainly not cost free. To implement and pay for it, the Liberal Democrats would have to raise from capital gains tax increases not £12 billion but £12.1 billion. Moreover, we discussed the Conservative idea of abolishing inheritance tax—at a cost of £1 billion—when we considered the previous group of amendments. Adopting new clause 3 would cause that total to rise to £1.1 billion. I therefore counsel hon. Members of both Opposition parties to be cautious about adopting policies that would cost £100 million, given that some of the other commitments that they have made would require substantial tax increases elsewhere.

I said that I wanted to restate the Government’s approach to annuities, and to reiterate the response to the recommendations of the Pensions Commission made by my right hon. Friend the Secretary of State for Work and Pensions in his recently published White Paper. In that document, we reiterated our policy of securing an income in retirement, and we rejected the principle underlying this new clause—that people aged 75 should not have to buy an annuity. At the same time, in response to some of the points made by the commission, we undertook to publish later in the year a detailed paper setting out the evidence base for our policy.

The Government’s policy on annuities is very clear. Very generous tax reliefs are provided to encourage people to save for their retirement. Contributions may be paid with the benefit of tax relief and investment income and growth may accumulate in a pension fund tax free. In addition, when people come to take their pension benefits, they can take up to 25 per cent. of their total pension pot as a tax-free lump sum. In return for those generous tax incentives on the way in, there are long-standing rules that require a person, by the age of 75 at the latest, to convert the remainder of the pension pot into a secure retirement income for life, or to provide for dependants’ benefits. Over 90 per cent. of people aged 70 have already bought an annuity, so only a very small number of people have to make such decisions when they reach 75.

I shall deal later with the Pensions Commission’s recommendations on annuities, but its report endorsed the fundamental principle that a retirement income should be secured by an annuity, in return for tax relief on the way in. It said:

“Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pension saving is turned into regular pension income at some time.”

For the vast majority of people who do not get a pension paid directly from their scheme, an annuity will be the best way to secure an income for their retirement. The most recent evidence suggests that annuities are fairly priced and value for money. People do not know how long they will live after they retire, and tend to underestimate their longevity. Without a requirement to secure an income, there is a danger that they will run down their retirement savings either too fast or too slowly.

Insurance companies know, broadly and on average, how long people will live, and offer products that pool the risk. Welfare is therefore improved at the aggregate level.

Steve Webb
Is that not a rather paternalistic approach? Why should not people who receive an occupational pension sufficient to keep them above means-tested benefits be able to choose to take a risk about whether they draw their pot down too fast or too slowly? As long as the tax is paid and the state does not lose, why should they not be free to do what they like?

Ed Balls
I shall give a more detailed explanation of the £100 million cost of the new clause in a moment, but I can tell the hon. Gentleman that the median pension pot is about £25,000 a year, although many people get much less than that. To achieve an annuity of that size, a person would have to have a pension pot very substantially above the median amount. The pension pots of 19 people out of 20 would be too small to give an annuity of that size. We are talking about a policy that would benefit only the wealthiest 4 or 5 per cent. of the population in pension pot terms.

19:30:00

The hon. Member for Northavon also made a point about tax. We pay substantial amounts of tax relief on the way in and, if we were to have an equivalent tax take on the way out, to make sure that people saving for a pension were not advantaged by knowing that they could pass it on with inheritance tax paid at the end, inheritance tax would need to be substantially higher than the current rate. I accept that Members have tabled supporting amendments to apply inheritance tax charges, but the reason the cost will be £100 million is that charging inheritance tax would not come anywhere near to clawing back the kind of tax benefit that a person would receive from going in with tax reliefs but then not buying an annuity. The fear is that there would be a substantial amount of tax planning for pensions that avoided the need to buy an annuity. The number of beneficiaries might rise slightly above the 4 per cent. of the population who would benefit from new clauses 3 and 7, but it would still be a minority pursuit, which would be expensive for the taxpayer and would require tax rises elsewhere, to no benefit.

John Hemming (Birmingham, Yardley) (LD)
Is the hon. Gentleman saying that the median pension pot is £25,000 a year or that the actual pot is £25,000?

Ed Balls
If the hon. Gentleman has been following the debate, he will know that we are talking about the amount of pot a person would need to buy an annuity that delivered the minimum retirement income to which we have referred. The overall amount in the pot would need to be substantially higher than the median to provide the necessary income.

John Hemming
So it is the median pot.

Ed Balls
Exactly; the pot that a person would need to buy the annuity.

John Hemming
Not the amount per year?

Ed Balls
No, the pot, because a person would transfer their pot into purchase of the annuity.

Over and above the already generous tax incentives for saving for pensions on the way in, we have introduced flexibility in a number of ways over the last few years, through the Finance Act 2004 and also through the new tax regime that we introduced on 6 April, which gives much greater flexibility and simplicity for pensions saving. We have added flexibility to saving for retirement provision in several ways.

First, as the hon. Member for Fareham (Mr. Hoban) mentioned earlier, we are continuing in the new regime the facility to defer taking an annuity and instead to take income withdrawal. Annuities often represent the most efficient way of turning a capital sum into income, but there could be circumstances—perhaps when the scheme member was relatively young and there was a reasonable expectation that the underlying investments of the pension scheme would perform well—when some people might benefit from not being tied into the then prevailing annuity and gilt rates paid later in life. As Members know, the income draw-down rules introduced by the Government allow people to take an income and defer taking an annuity until a more opportune occasion.

The hon. Gentleman gave the impression, perhaps inadvertently, that there are no limits on the degree of draw-down. That is not correct; there are clear rules that allow, in the new regime, a maximum amount to be drawn down for income withdrawal, while allowing resource to remain for the purchase of the annuity—the income guarantee, which is the prime motivation for the existence of the tax reliefs. By contrast, the facilities offered under new clauses 3 and 7 would actually allow the whole amount—way beyond the maximum level we have set in the draw-down legislation—to be taken in draw-down without the need to buy an annuity.

Only a small minority of people have sufficient wealth to benefit from those opportunities in a way that sensibly assesses risk. Only those individuals could take the risk of not making provision through an annuity. Our view is that providing a substantial tax advantage to allow that, as the new clauses would do, for one in 20 of the population with a pension pot at age 75 would not be the right way to spend taxpayers’ money.

A second way in which we have added flexibility is that tax rules now allow a new product, a limited period annuity, which enables someone vesting their pension fund to use part of the fund to provide an annuity for a maximum period of up to five years. We have also made a change to allow value-protected annuities to be offered, to allow a return of capital on an annuity where a member dies before reaching age 75.

As the hon. Member for Fareham reminded us, we have also introduced an alternatively secured pension—ASP—for pension scheme members who have not secured their pension benefits by age 75, where the member has a principled religious objection to the pooling of insurance and mortality risk. As the hon. Gentleman knows, and as the quotation from my right hon. Friend the Member for Bolton, West (Ruth Kelly) to which he referred makes clear, it was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections as the Christian Brethren. It has always been our intention to replicate the secure lifelong income obtainable from an annuity through those measures, but not to allow that to become a way in which a small and wealthy minority could benefit substantially from tax advantages to the cost of taxpayers overall. We have always made it clear that we shall not allow those concessions to be taken up more broadly to get round the annuity rules. This is not a mainstream product and it must not become a tax avoidance measure. We shall not be going down that road.

Finally, we have taken steps to ensure that more people with small retirement funds can avoid the need to purchase an annuity which, although secure and guaranteed, is neither cost-effective to pay or to receive, because the amount in the pension pot is so small.

The hon. Member for Fareham mentioned the Turner commission report and we shall be setting out a detailed paper in response later in the year. The Turner report looked at pensions policy 20 or 30 years ahead and the commission advises us to look at all the issues in the round over time, including limits and ages. We shall certainly do that. Following publication of the first Turner report, we took up the suggestion that we should examine the case for not requiring the full purchase of an annuity at 75. Our view is that our policy is right for the present and that to follow that suggestion would be complex and bureaucratic and benefit only a small minority at wider expense to the taxpayer, all as a result of substantial increases in tax rates. That would be the wrong road for us to take.

Steve Webb
The Minister gave us what sounded like a precise estimate of the costs, although I believe them to be closer to zero. Is he willing to put in the Library a detailed note setting out where his figure of £100 million comes from?

Ed Balls
I shall be happy to do so. If the hon. Gentleman were to ask me a written question, I should be happy to provide him with the figure, but I think that he will find that it is £100 million. The Revenue has much experience in such matters. We understand exactly the motivation behind the proposals. To be more precise, my estimate is that the figure would be upwards of £100 million, which may mean that the size of capital gains tax rise that the Liberal Democrats would need will creep up from £12.1 billion to £12.1 billion-plus. We are looking forward to hearing the details of the Liberal Democrats’ tax policies and how they intend to reconcile their commitment to supporting wealth, prosperity—

Madam Deputy Speaker
Order. I remind the Minister that, however interested he may be in hearing those policies, this is not the time or the place.

Ed Balls
I am sure that you are right, Madam Deputy Speaker. There will be other times when we can debate those tax policies and we are looking forward to learning the details in due course. I will provide the hon. Member for Northavon with details of our costings and look forward to his providing us with details of his.

Turning to the specific proposals under discussion, as outlined by the hon. Member for Fareham, we have before us a proposal to allow people to set up a retirement income fund from which they may make withdrawals on reaching the age of 75, provided that they first purchase an annuity to secure a minimum income requirement. New clause 7 provides for the equivalent facility for dependants. I have explained already in answer to Opposition interventions why that would be inconsistent with both the principles that have guided our approach to annuity policy over the past few years and the cautious and careful flexibility that we have introduced over the past couple of years and why it would represent a substantial cost to the Exchequer.

I could also explain at length why the proposals are bureaucratic, complex and technically flawed, but I will resist the temptation. Suffice it to say that we urge Opposition Members not to spend £100 million tonight on those measures and, instead, to continue to support us and the wider industry in implementing the Turner commission proposals and the wider A-day pension simplification that we have introduced. A consensus on pensions policy has eluded us for a long time—it is something that we hope to achieve—so let us make it a consensus about the importance of using tax relief to benefit the majority, rather than a very small minority.

Turning to amendments Nos. 62 and 14, which cover the recycling of lump sums. As the hon. Member for Fareham says, those amendments were motivated by a concern that the recycling rule might catch certain cases of normal retirement planning. His view is that the guidance notes restrict the scope of the legislation and that, without the guidance notes, clause 159 would have far wider ramifications than is intended.

In Committee, I offered to circulate any significant material changes to the guidance to the hon. Gentleman, to give him a chance to comment if we made any such change. On the basis of his speech this evening, I am happy to offer that opportunity more widely if any other Opposition Member would like to be consulted on the guidance. That offer was in no way intended to be ad hominem. I will endeavour to ensure that there is proper consultation on those matters.

More importantly, following the tabling of amendments Nos. 62 and 14, I took the opportunity to reconsider the legal status of both the legislation and the guidance notes and to hold discussions with relevant legal and technical specialists. Following those meetings, I am pleased to be able to assure the House that the recycling legislation does not have the wider ramifications that the hon. Member for Fareham fears and that the guidance has no concessionary or discretionary effect whatsoever.

The guidance notes contain a number of worked examples because, as the right hon. Member for Suffolk, Coastal (Mr. Gummer) would agree if he were here, the world is a complex place and people can construct many different kinds of turbocharged recycling schemes to try to avoid tax. It is important that people understand the way in which the Revenue will proceed in each kind of case. I have quoted to the hon. Member for Fareham in interventions the views of the Chartered Institute of Taxation on these matters.

We have tried to be consultative and to listen to those in the industry and to ensure not only that their comments are incorporated into the legislation, but that the guidance provides the fullest explanation of our intent, so that, as I said earlier, we can ensure that expensive tax avoidance is not tolerated and that innocent pension savers are not disadvantaged by those clauses. On the basis of the assurances that I have given the hon. Gentleman this evening, I hope that he will agree that to try further to clutter tax legislation by trying to move guidance notes into legislation is unnecessary. I ask him not to press amendments Nos. 62 and 14 and accept my assurances instead.

Finally, I want to make a short comment on Government amendments Nos. 31 and 97. The new pensions tax regime, which came into force on 6 April, removed a number of outdated and complex rules. The pension tax simplification changes included provisions for the rationalisation of the lump sum payments that pension schemes can make. One of those lump sums—a short-service refund lump sum—may be paid when someone has less than two years’ pensionable service and effectively permits a refund of the contribution that the member has paid into the scheme.

19:45:00

One of the requirements of the short service refund lump sum is that the payment extinguishes all the member’s entitlement to benefits under the scheme. We have recently received representations from the industry that that requirement would cause difficulties for contracted-out money purchase occupational schemes, which, to comply with Department for Work and Pensions protected rights legislation, must retain for the member certain rights within the scheme. That could effectively prevent such schemes from providing short service refund lump sums, where they would otherwise meet all the conditions for their payment.

Amendment No. 31, therefore, provides for an exception to the requirement that all the member’s entitlement to benefits under the scheme must be extinguished to the extent that the scheme must retain certain rights of the member to comply with other legislative requirements. That amendment will introduce a welcome relaxation in the rules for the pension industry. I urge members to accept it. I know that it will be widely welcomed by the industry, following the consultations that we have had in recent weeks.

Amendment No. 97 will correct a minor technical error in the changes we are making in the Bill to the available transitional protection and ensure that a missed consequential change is incorporated into the legislation.

To summarise, I invite the hon. Member for Fareham to withdraw the motion on new clause 3, not to press new clause 7 or amendments Nos. 107 to 120 and to join us in a consensus on pensions that does not allow tax relief to be diverted to tax avoidance by a small number of people. I ask him not to press amendments Nos. 62 and 14 on the recycling clause and accept my assurances that we will proceed properly in future and consult on any change in the guidance. I ask the House to accept Government amendments Nos. 31 and 97, which will further strengthen the long-term regime for pensioners in this country.

Mr. Hoban
I thank the Economic Secretary for his remarks. He has given a fairly lengthy speech on new clauses 3 and 7 and the amendments. After listening to it, I am unconvinced about the Government’s rationale for opposing new clause 3. The hon. Member for Northavon (Steve Webb) referred to the opportunities that a change to the annuitisation rules would create: an improvement whereby a number of people would gain, whereas others would not lose. Such a change could go further than that. Certainly, the Turner commission’s view was that, yes, some people would gain directly, but a great many people would gain indirectly through lessening of the pressure on annuities and markets in the long term. Many people would seek to achieve that gain, particularly as there would be more demand for annuities in the future, with a shift from defined benefit schemes to defined contribution schemes, as I said in my opening remarks.

The Treasury is fighting a rearguard action. The Economic Secretary talked about the alternatively secured pension scheme being available for a small number of people, but more people will take advantage of such schemes. There will be an appetite for that, because people do not want to be tied to the idea of a compulsory annuitisation of the pensions at the age of 75. They want to have the flexibility in retirement to use their funds in a different way. They want to determine their income. They are concerned about the declining annuity rates and the impact of that on their pensions. On that basis, I propose to press new clause 3 to a vote.

I want to make a final remark on recycling. The Economic Secretary sought to persuade us that our fears about the use of such rules are ill-founded, that the guidance is sufficiently robust and applicable, and that we should have no concerns about it. I am afraid that, on that, too, I am not persuaded, and with the leave of the House at the appropriate time, I will seek to move either amendment No. 62 or 14 formally, but I ask my hon. Friends to vote for new clause 3 and I invite the Liberals to be on the side of the angels again, as the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said earlier, in voting with us tonight on new clause 3.

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

Division 274
04/07/2006 19:49:00
The House divided:
Ayes: 207
Noes: 289
Question accordingly negatived.

New Clause 4

Fuel duty (remote areas)

‘In the Hydrocarbon Oil Duties Act 1979 (c. 5) section 6 (excise duty on hydrocarbon oil) there is inserted after subsection (1A)—

“(1AA) The Treasury may, by order made by statutory instrument, specify lower rates of duty under subsection (1A) in respect of hydrocarbon oil products sold in remote areas.

(1AB) For the purposes of this section ‘remote areas’ shall be defined in regulations made by the Treasury by statutory instrument.

(1AC) Orders or regulations made under this section shall not come into force unless approved by a resolution of the Commons House of Parliament.”.’.—[Danny Alexander.]

Brought up, and read the First time.

Danny Alexander (Inverness, Nairn, Badenoch and Strathspey) (LD)
I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Sir Michael Lord)
With this it will be convenient to discuss the following:

New clause 6—VAT and hydrocarbon oil duty offset—

‘In the Hydrocarbon Oil Duties Act 1979 (c. 5) section 6 (excise duty on hydrocarbon oil) there is inserted after subsection (1A)—

“(1AA) In every Budget Statement the Chancellor of the Exchequer shall provide his forecast for oil prices and set out anticipated yield from fuel duty and VAT on fuel for this price and for a range of prices up to 50 per cent. above his forecast.

(1AB) In his 2006 pre-budget report the Chancellor of the Exchequer shall bring forward a mechanism for—

(a) using additional revenue from VAT on fuel above forecast to offset fuel duty when the oil price rises above his forecast level, and

(b) providing specific fuel duty reductions targeted at fuel sold in sparsely populated areas;

and the Chancellor of the Exchequer shall by order define ‘sparsely populated areas’ for the purposes of this section.

(1AC) Whenever international oil prices rise above the level estimated by the forecast made in accordance with subsection (1AA), indexed fuel duty increases shall be frozen until the international oil prices return to the forecast level.”.’.

Amendment No. 123, in clause 13, page 14, line 15, leave out Table A and insert—

-------------------------------------
|CO2 Emissions figure |Rate         |
-------------------------------------
|(1)                  |(2)          |(3)|(4)|(5)|
-------------------------------------
|Exceeding            |Not Exceeding|Reduced Rate|Standard Rate|Premium Rate|
-------------------------------------
|                     |             | |Households with a postcode in a remote rural area| |Households with a postcode in a remote rural area| |Households with a postcode in a remote rural area|
-------------------------------------
|g/km                 |g/km         |£|£|£|£|£|£|
-------------------------------------
|100                  |120          |30|15|40|20|50|25|
-------------------------------------
|120                  |150          |90|45|100|50|110|55|
-------------------------------------
|150                  |165          |115|57.50|125|62.50|135|67.50|
-------------------------------------
|165                  |185          |140|70|150|75|160|80|
-------------------------------------
|185                  |-            |180|90|190|95|195|97.5|
-------------------------------------


Amendment No. 129, page 14, line 26, leave out Table B and insert—

-------------------------------------
|CO2 Emissions figure |Rate         |
-------------------------------------
|(1)                  |(2)          |(3)|(4)|(5)|
-------------------------------------
|Exceeding            |Not Exceeding|Reduced Rate|Standard Rate|Premium Rate|
-------------------------------------
|                     |             | |Households with a postcode in a remote rural area| |Households with a postcode in a remote rural area| |Households with a postcode in a remote rural area|
-------------------------------------
|g/km                 |g/km         |£|£|£|£|£|£|
-------------------------------------
|100                  |120          |30|15|40|20|50|25|
-------------------------------------
|120                  |150          |90|45|100|50|110|55|
-------------------------------------
|150                  |165          |115|57.50|125|62.50|135|67.50|
-------------------------------------
|165                  |185          |140|70|150|75|160|80|
-------------------------------------
|185                  |225          |180|90|190|95|195|97.50|
-------------------------------------
|225                  |-            |200|200|210|210|215|215|
-------------------------------------


Amendment No. 125, page 15, line 8, at end insert—

‘(3A) After paragraph 1B insert—

“1BB For the purposes of paragraph 1B above, ‘remote rural area’ shall be defined in regulations made by the Treasury by statutory instrument.”.’.

Danny Alexander
The purpose of the new clause is to enable the Treasury to specify lower rates of duty on fuel to apply in remote rural areas. Hon. Members will know that article 19 of the European Union’s energy products directive allows member states to apply for a derogation to allow lower duty rates in specified areas. In October 2004, the French Government, with the support of UK Ministers and Ministers of other member states in the Council of Ministers, did just that, following the example set by the Portuguese and the Greek Governments in previous years.

My argument for applying that measure in the United Kingdom rests on the very serious economic impact that higher fuel prices in rural areas have on areas such as the highlands and islands of Scotland. The truth is that people living in remote areas such as the highlands and islands are victims of a triple whammy. They pay higher fuel prices and have much longer distances to travel, with few or no alternatives to making those journeys by car. Unavoidably, they spend more on transport than others and therefore also contribute more to the Treasury. Motoring costs represent some 18 per cent. of total household expenditure in rural Scotland compared with 13 per cent. across the rest of Scotland.

Mr. Andrew Turner (Isle of Wight) (Con)
The hon. Gentleman mentions some exceptionally distant rural areas and says that motoring is the only option, but that cannot be the case in the islands of Scotland, because ferries will be important as well. Where does he expect the line to be drawn between remote areas that would benefit from his new clause and non-remote areas that would not so benefit?

Danny Alexander
The hon. Gentleman anticipates a later part of my remarks, so if he will allow me I will press on.

Median earnings in the highlands and islands are some 85 per cent. of the UK figure, so the inequitable situation that I described hits an already poorer region very hard. Before coming to the Chamber today, I conducted a random survey of pump prices for a litre of unleaded petrol. In Aviemore in my constituency, where I happen to live, the current price is 99.9p per litre. In Dalwhinnie, a little further south, it is 102p per litre. In Thurso, in the constituency of my hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso), it is 102p per litre. In Lerwick, in the constituency of my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael), it is 106.9p per litre. By comparison, at Asda in Leeds the price is 92.9p, while in Morrison’s in Camden in north London, it is 90.9p.

At its broadest, the variation is nearly 20p per litre. In my home town of Aviemore, which is on the A9, one of Scotland’s main trunk roads, my constituents would pay some 10p per litre more than constituents of hon. Members in London. For an average-sized small car, that might equate to an extra £4 on a tank of petrol. The final price of a litre of fuel includes VAT, so we have the anomalous situation whereby we are paying more in VAT than elsewhere because the retail price for fuel is higher. In sum, the main beneficiary of higher fuel prices in rural areas such as the highlands and the islands is the Exchequer. The new clause proposes a system to return that rural windfall to some of the areas whence it came.

The high price of road fuel in the highlands and islands has done, and is doing, considerable social and economic damage to some of our most vulnerable rural communities. This is not just about business people with big cars and high mileages; it is about people on low incomes in relatively poorly paying sectors such as tourism, retailing and food processing, of which we have a high share in the highlands and islands. The low population density means that there can be long distances to public services such as hospitals and to places of employment, with no alternative but to use a car.

Mr. Alistair Carmichael (Orkney and Shetland) (LD)
My hon. Friend rightly points out that in Lerwick we are paying 106p per litre for our petrol. If he goes out into the country parishes, he will find that it is significantly higher even than that. That encourages people from the country parishes of Shetland to drive into the town to get their petrol, with the result that they then use the town’s shops and services, thereby affecting the small and economically fragile shops and services in the smaller outlying parts of already remote areas.

Danny Alexander
I am grateful to my hon. Friend. The same phenomenon can be seen in constituencies across the highlands and islands. In my constituency, the differential in petrol prices often encourages people to drive to Inverness to use the services there, with an ongoing knock-on effect on rural filling stations, shops and other businesses in rural areas. That is why the new clause says that the line would need to be drawn by Treasury regulations. I am sure that many civil servants in the Treasury are expert enough to draw up an appropriate set of rules. The method used by the Scottish Executive in apportioning their rural filling stations grant scheme might well provide one basis on which such a system could work.

Rob Marris
As a quid pro quo for these proposals, would the hon. Gentleman and his party be prepared to abandon the Barnett formula forthwith?

Danny Alexander
No.

John Bercow
The hon. Gentleman should not be sedulously tempted down that narrow path, on a completely unrelated issue, by the hon. Member for Wolverhampton, South-West (Rob Marris). I understand the concern about the perceived inequity of differential pricing, but can the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) tell the House for what proportion of the purchase price per litre in his constituency excise duty accounts?

Danny Alexander
I think that it accounts for a very substantial proportion—and what is more, as I was explaining earlier, because of the other factors that lead to the price being higher in rural areas, the Treasury gets a windfall through VAT.

The Financial Secretary to the Treasury (John Healey)
Perhaps I can help the hon. Gentleman. The answer to the question asked by the hon. Member for Buckingham (John Bercow) is 47.1p per litre.

Danny Alexander
I am grateful to the Minister for that.

The purpose of the amendment is to propose a relieving measure for rural areas to take account of the fact that petrol prices are much higher, that car use is much more of a necessity, rather than a luxury, and that the distances driven tend to be much longer, so people are making longer essential journeys and spending much more of their income on fuel at higher prices, which is giving a windfall to the Treasury through the VAT system. This is a relieving measure to try to address some of the consequences of that, to which I want briefly to return.

Rob Marris
The hon. Gentleman is being very generous in giving way. He was talking about an anomalous situation before. Is not his proposal somewhat anomalous in light of the Liberal Democrats’ proposals to increase green taxes? This seems to be going in completely the opposite direction; it is putting down the price of fuel.

Danny Alexander
The hon. Gentleman anticipates my concluding remarks, in which I will address that point directly.

By accepting the amendment the House can signal its determination to relieve the burden of a tax that is undermining rural development and worsening rural poverty. By allowing a derogation to a lower rate of fuel duty for remote areas, appropriately defined, we can adopt an interim measure that will make an immediate difference. It is my view, and that of my colleagues, that in the long term a system of road user charging would allow the fairest distribution of cost and significant benefits to people living in remote areas.

Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)
Clearly, in a remote area using cars is more environmentally friendly—because people use them when they need them—than regularly running lots of empty buses without passengers. Road user pricing would therefore be more environmentally efficient, as the price would reflect the area in which the car was being used.

Danny Alexander
I am grateful for that intervention. As usual, my hon. Friend makes very wise comments.

Some hon. Members, as we have just heard, may worry about the environmental impact of this change, but in areas where a car is a necessity that is absurd. Of course we need to drive more fuel-efficient cars—that applies as much to people in rural areas as it does to those in urban areas—but taxing rural motorists off the road means wiping rural communities off the map. I say to the House that sustainable rural communities are as important to our environmental objectives as they are to our social and economic objectives, so I hope that the new clause will win support in all parts of the House.

Mr. Paul Goodman
We welcome with enthusiasm the opportunity once again to debate hydrocarbon oils. Indeed, this debate has a familiar ring, although on this occasion we do not have present the hon. Member for Eastleigh (Chris Huhne), who during the debate in the Committee of the whole House seemed, as far as I could see, to lead for the Liberal Democrat Front Bench. [Interruption.] The hon. Member for Wolverhampton, South-West (Rob Marris) says that he did, and I would not quarrel with that assessment for a moment.

John Thurso (Caithness, Sutherland and Easter Ross) (LD)
I ask the hon. Gentleman’s forgiveness, but it seems to me that we are discussing hydrocarbon duties now, and that debate was about vehicle excise duty. There is a difference.

20:15:00

Mr. Goodman
The hon. Gentleman plainly has not read the list of amendments in front of him grouped under the heading “Hydrocarbon oil duty and vehicle excise duty”. He will see, if he reads it, that amendments Nos. 123, 129 and 125, which are all part of this group, refer to vehicle excise duty. I suggest that next time, he read the selection list before making an intervention. Since the earlier amendments were substantially the same as two of those in the group that we are now considering, I want to refer back to them for a moment.

The first proposed to reduce the rate of VED for the most polluting vehicles registered before 23 March this year and owned by households with a postcode in a remote rural area. The second proposed not to change the rate of VED for the most polluting vehicles registered after 23 March and owned by households with a postcode in a remote rural area. The third proposed to raise the rate of VED for the most polluting vehicles registered after 23 March and owned by households with a postcode in a remote rural area. [Interruption.] The hon. Member for Falmouth and Camborne (Julia Goldsworthy) says from a sedentary position that the latter was not selected. I was not claiming that it was selected, although as she has raised the point, one might question the wisdom of tabling an amendment that cannot be debated—but I shall return to that in a moment.

After the debate in the Committee of the whole House, which those of us who were there remember with affection, the Liberal Democrats chose not to press their amendments to the vote, which suggested to the rest of us a certain lack of confidence in them. I shall return to that point later. It is not perhaps a very good sign that three of the amendments in this group cover the same ground as was covered during the debate in the Committee of the whole House.

Our view is straightforward: we acknowledge the seriousness of the transport problems faced by people who live in remote rural areas, to which I shall return later. Indeed, Conservative Members represent the bulk of rural areas—although, I concede, not the bulk of remote rural areas as the Liberal Democrats are defining them. However, we believe that the one-off cost of VED is not the main problem faced by people who live in remote rural areas, and that any fiscal solutions to those problems must be fair, simple to administer and proof against fraud, and above all they must not simply leave a black hole in the Government’s accounts.

With the greatest respect to the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander), who spoke to the new clause, which I shall come to in a moment, it is very hard to see how it can be fair simultaneously to reduce the rate of VED for the most polluting vehicles registered before 23 March this year and owned by households with a postcode in a remote rural area, as amendment No. 123 proposes, and not to change the rate of VED for the most polluting vehicles registered after 23 March and owned by households with a postcode in a remote rural area, as amendment No. 129 proposes, while wishing all the while, apparently—I shall not dwell on this point, even though it is potentially a little embarrassing for the Liberal Democrats—to raise the rate of VED for exactly the same households in exactly the same circumstances, as amendment No. 124 proposes. As I say, I shall not dwell on the amendment that the Liberal Democrats tabled but which we cannot debate. I shall move on.

John Bercow
Will my hon. Friend give way?

Mr. Goodman
I cannot resist the invitation from my hon. Friend.

John Bercow
I am listening to my hon. Friend’s exegesis of the different Liberal Democrat amendments with great interest. It does rather call to mind, I put it to my hon. Friend, the famous verdict of the late Harold Macmillan that the Liberals’ good ideas are not original and their original ideas are not any good.

Mr. Goodman
My hon. Friend is never lost for an apt quotation, and I cannot think of a more apt one myself, although he may well be on his feet in a moment to suggest another.

I turn to the tests of simplicity and of fraud. Registering vehicles that belong to households with a postcode in a remote rural area for lower rates of VED is scarcely likely to be simple in practice. As the Financial Secretary pointed out on 3 May, motorists could easily register vehicles in designated remote rural areas and then use them predominantly or exclusively in urban areas, since, as I hope the Liberal Democrats will concede, a car registered in a more rural area can in fact be driven to an urban area.

Then there is the question of cost. Amendment No. 125 invites the Treasury to define “remote rural area” in regulations. New clause 4, which was also tabled by the Liberal Democrats and to which the hon. Member for Inverness, Nairn, Badenoch and Strathspey has just spoken, refers to remote areas and, as he made clear, proposes lower rates of duty.

As the hon. Member for Dundee, East (Stewart Hosie) pointed out in a telling speech on 3 May, there is no agreement on the definition of a remote area. The description offered by the Scottish Executive covers 98 per cent. of Scotland’s landmass, and 18.7 per cent. of the population. The hon. Gentleman cited the Randall definition, which is based on sparsity of population and covers 89 per cent. of Scotland’s landmass and takes in 29 per cent. of the population. If the Liberal Democrats could offer a definition that commanded consensus they would surely have included it in new clause 4, rather than pass the parcel to the Treasury.

David Taylor (North-West Leicestershire) (Lab/Co-op)
As the hon. Gentleman is struggling to find a definition of remote areas on behalf of the Liberals, may I offer the following definition? A remote area is an area so remote from reality that it elects a Liberal Democrat to represent it in Parliament.

Mr. Goodman
The hon. Gentleman is trying his best to cap my hon. Friend the Member for Buckingham (John Bercow), but I will give him a serious answer. It is significant that the Liberal Democrats have left the definition in the hands of the Treasury. If they had a workable definition they would have included it in the new clause rather than pass the parcel to the Financial Secretary. As new clause 4 and the other Liberal Democrat amendments do not have a definition attached it follows, as night follows day, that they do not have a price attached. I do not know, but I suspect that the cost to the Treasury of a lower rate of duty and lower rates of VED in remote rural areas would be considerable. I am happy to give way to anyone who can tell me what the cost is, and how the Liberal Democrats propose to make up the lost revenue.

That leads me to my main point. The transport problems faced by people in remove rural areas are, as we have heard, formidable. Large vehicles are needed for agricultural and other work—that is not usually the case in urban areas—public transport is often non-existent, and there is far greater reliance on cars than in urban and suburban areas, as the hon. Member for Inverness, Nairn, Badenoch and Strathspey quite fairly pointed out. Our quality of life policy group, chaired by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), is therefore examining those issues as we formulate our policy programme in the run-up to the next election. That is preferable to introducing in the first year of a Parliament a series of hasty and apparently unfinanced tax cuts that show no sign of being properly thought through, and which, alas, open those who propose them to the charge of opportunism.

Mr. Carmichael
I will not detain the House for long. I loved every second of the speech made by the hon. Member for Wycombe (Mr. Goodman), but each minute probably lost the Tories about 200 votes in my constituency. Indeed, I shall take great delight in promulgating the views that he has just espoused on behalf of his party so that everyone in the highlands and islands and other remote parts of Scotland can see exactly what the Tories stand for.

Mr. Paul Goodman
Can the hon. Gentleman tell the House how much in lost revenue the amendment would cost the Treasury? [Interruption.]

Mr. Carmichael
My hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) says that he can, so I will let him do so. Tellingly, the hon. Member for Wycombe reminded us of why there are no Tory MPs left in the highlands and islands, where they used to represent a broad swathe of constituencies north of the Mull of Kintyre. The hon. Gentleman said that he did not know how much the proposal will cost, but he presumed that it would be a great deal. Why does he hold such a preconception? Why did he not say that he did not know how much the proposal would cost, but that he was prepared to take an objective and fair-minded approach to it?

Mr. Goodman
In an objective and fair-minded way, may I simply ask the hon. Gentleman, whose party has tabled the new clause, how much will it cost?

Mr. Carmichael
I have already told the hon. Gentleman I do not know exactly how much the proposal will cost, and I am unashamed to say so. If my hon. Friend the Member for Caithness, Sutherland and Easter Ross has a figure, no doubt he will favour us with it. The fact is, there is a basic inequity born of market failure. Liberal Democrats are prepared to talk about it, and to offer solutions which, whether or not they are costed, indicate a willingness to address the problem that is remarkably lacking among Conservative Members.

Mr. Andrew Turner
A solution that does not work is not a solution. We can examine the proposal, but we need information to do so. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander), who tabled the new clause, has not provided the information that the House needs to examine the proposal, so it is neither a useful solution nor, indeed, a useful proposal.

Mr. Carmichael
I do not accept that it is something that does not work because, as my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey pointed out, what we are proposing already takes place in a number of European countries, including Greece, Portugal and, most recently—ironically, with the support of UK Ministers—France. The Minister said at the Dispatch Box that since he has been in post, it has been impossible to do such a thing, but it has been done by Portugal, by Greece and, with the support of our own Ministers, by France, so I do not accept that it is beyond the wit of the British civil service. I hold our civil servants in high regard, so if French, Greek and Portuguese civil servants can do such a thing, they can do so, too.

John Bercow
The hon. Gentleman is extremely adroit in making the best of a bad case. I am relatively non-committal on the issue, and I am genuinely ready to be persuaded, as I am not over-preoccupied with the verdict of shadow Ministers, as the hon. Gentleman has probably noticed over the years. We have been confronted with the cumulative intellectual weight and financial acumen of the hon. Member for Falmouth and Camborne (Julia Goldsworthy) and the hon. Member for Eastleigh (Chris Huhne), yet the hon. Member for Orkney and Shetland (Mr. Carmichael) is unable to vouchsafe to the House the financial cost of the new clause tabled by his hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander), so I am a little anxious.

Mr. Carmichael
The hon. Gentleman’s anxiety always causes me anxiety. Indeed, I took a similar view to those on the Front Bench until I joined my own. Measures beyond number have been introduced in the House, both by the present Government and by Conservative Governments, without an exact financial quantification. We have proposed a principle to deal with a problem that causes serious economic and social hardship. As is often the case in the House, we should allow the details to follow later. Accepting the proposal commits the Government to nothing. It is an enabling measure, rather than a prescriptive one, that gives them the power to deal with the problem. I have lost count of the number of occasions in Committee and on Report when the Government have proposed such enabling measures and said, “Trust us—we’ll deal with this later.” We are giving a power to the Government, and we are prepared to trust them to do the work and bring the figures to the House at a later stage.

The proposal introduced by my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey is necessary. As he has pointed out, people using the cheapest petrol pumps in my constituency pay about 105p per litre. In the remoter parts—the outlying parishes in Orkney and in Shetland, and the outer islands away from the mainland of Orkney and Shetland—the price is much higher than that. When I was first elected in 2001, people in Hoy in Orkney were already paying more than £1 per litre. That causes real financial difficulty.

20:30:00

Many of the people living in those communities are on low and fixed incomes. They do not have public transport running at the bottom of their road every five or 10 minutes. They have to use a private car because they have no option. The Government take in the form of value added tax, quite apart from the fuel duty, hits those people particularly hard because they start from a lower income and pay more.

In the villages and towns in my constituency, petrol is sold from small petrol pumps and shops that do not have the purchasing power of Asda, Tesco and other big suppliers in the towns and cities. That is the root of the problem. The Treasury has come up with all sorts of answers. It has told us that we cannot introduce such a measure because people will drive from areas where they already get cheap petrol to areas such as those represented by my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey—my goodness, I wish he had a shorter constituency name—simply to get petrol that they could buy, at best at the same price, and probably cheaper, if they stayed at home. The logic of such objections does not bear rational examination.

Sir Robert Smith
The converse, which the Treasury does not seem to accept, is that under our proposal, people will stay in the local community and buy their fuel locally without making the extra journey to another area, which will keep the local economy more buoyant and reduce the travel time and the amount of fuel that they consume.

Mr. Carmichael
Indeed. That is the point that I made in an intervention on my hon. Friend the Member for Inverness and all the heathery bits.

Rob Marris
On the figures, new clause 4 is an enabling clause which, if passed, would enable a lower rate to be set for excise duty on fuel. Approaching it from the other end, in terms of forgone tax revenue, how much does the hon. Gentleman think the Treasury should spend on the measure? He could give us that figure and from it one could work out, in terms of the number of litres sold in remote rural areas and so on, what the discount on fuel would be. How much does he think the measure should cost?

Mr. Carmichael
The hon. Gentleman is inviting me to speculate on any number of ifs, buts and maybes that might start with the cost of oil on the world markets, go to the level of fuel duty, and from there to the rate of value added tax. The answer to him is the same as it was to the hon. Member for Wycombe: it depends on the figures that the Treasury is able to produce at the time.

What we want to hear today from the Financial Secretary is that at last he is prepared to take seriously the fact that there is a problem which causes real hardship to individuals and to businesses in my constituency and in many others represented in the House. Rather than spending all their time and energy producing excuses for not implementing such a measure, let his civil servants recognise the problem, examine it and act, otherwise the situation will never improve and the sustainability of our communities will never be maintained.

Julia Goldsworthy
The passion with which my hon. Friends have spoken is an indication of how strongly they feel about the issue. We are trying to get recognition of the problem. All our constituents will be disappointed by the responses from those on the Conservative Benches. We are raising the issue again because of the importance that we attach to it. We want to open up a constructive debate and discuss the issue in the context of measures to persuade people who are able to change their behaviour to behave in a more environmentally friendly way, while not penalising those who have no other options. We are disappointed that hon. Members on both sides of the House are trying to close down such a debate.

Mr. Andrew Turner
When one wants a constructive debate to take place, one starts by providing information. It would not have been difficult for the Liberal Democrats to ask questions, table questions to Ministers, seek the advice of civil servants and ask their research assistants to do some work in the Library to formulate a range of options, as my local authority did when we took control from the Liberal Democrats and introduced a 50p bus fare for every person under the age of 19 on the island to travel anywhere on the island. That was done before we took control. The Liberal Democrats have ample facilities, as have all of us in the House—I can see, Mr. Deputy Speaker, that you want me to shut up—to undertake that work. I wish they had done so, because they would be taken more seriously.

Julia Goldsworthy
If the hon. Gentleman has such resources at his fingertips, he could have raised the issue himself. If the communities that my hon. Friends described had access to buses, they would happily provide subsidised fares, but for many of those communities there are no bus services and to provide them would be worse for the environment. An equivalent service to the one in the hon. Gentleman’s constituency could not be provided.

I draw the hon. Gentleman’s attention to the comments made to those on his Front Bench in the discussion of minimum pensions income. His Front-Bench team will remind him of why it is not possible to give detailed information. The reason why we refer to Treasury regulations is that there is no UK definition of a remote rural area. There are definitions that apply to England and Wales, but if those were mentioned in the new clauses and amendments, they would not include Scotland. My hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) is therefore trying to produce enabling measures in order to provoke a debate. Transport costs alone make fuel significantly more expensive in the highlands than in more densely populated parts of the UK. We are trying to respond to problems experienced across the country. All the amendments and new clauses in the group try to deal with those problems in different ways.

One solution would be to more forward more quickly on road user charging, which would be a more flexible way of discouraging car journeys in congested areas, which cause the most pollution, while not penalising those who do not generate congestion and who do not have access to public transport alternatives. If the Minister can tell us that the Government intend to push forward on such a long-term policy, we would welcome it, and we would welcome a time scale.

Costs are much higher in rural areas and there is no immediate solution. The 2003 national travel survey for England showed that half the residents in rural settlements of fewer than 3,000 people lived within 30 minutes’ walk of a bus stop. That compares with 95 per cent. of people living in larger urban areas. I am sure that in many parts of the constituency of my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey people will have an even longer walk.

Those rural residents are likely to spend more per week on transport than their urban counterparts. The expenditure and food survey for 2002-03 showed that households in rural areas with a population of fewer than 3,000 spent more than £70 a week on transport, compared with £45.50 for those living in urban areas. Half their expenditure goes in operating costs, a large proportion of which is the cost of fuel.

New clause 4 seeks to lower the rate of duty in remote areas, as defined by the Treasury, and would give the Government the powers to apply for a derogation from the energy products directive, as has recently been successfully undertaken by the French Government. I understand that that was unanimously approved by the EU, as was referred to earlier, which means that it must have had the support of the UK Government. Why does the Minister think that remote and rural areas in the UK do not fulfil the same objective socio-economic conditions as the regions in which the derogation is applied in France?

Because of the lack of transport alternatives, consumers are unable to respond to price incentives. They just have to bear the higher cost, since there will be no cheaper alternative. Hence this proposal is logical and fair, not least because incomes also tend to be lower in more isolated and often more economically deprived constituencies. Although I represent a constituency at the opposite end of the UK to that of my hon. Friend, many of the experiences and difficulties that he has described are familiar to me and my constituents.

The amendments tabled in my name seek to achieve similar ends to the new clause, but I am not proposing that both alternatives should be put forward simultaneously. As I have said, we seek to propose a range of alternatives to highlight the situation and provide the Government with a range of approaches. We know that the alternative proposed by my hon. Friend works because it has been applied in other countries. Unfortunately, because all our amendments have not been selected we will not be able to vote on the whole package that we have proposed, so I hope that my hon. Friend will press his new clause to allow the Treasury at least to consider the issues.

The fundamental reason for providing such a concession in my amendments is to recognise the high cost of travel in rural areas. They allow for the revalorisation of fuel duty to continue. We welcomed that when the Chancellor announced it in the Budget. If that continues, and if it is the Government’s intention to increase the share of green taxation as a proportion of the total tax take, it will be those people whose behaviour will not be affected by the increases who will have to bear the costs. Therefore, we seek some way of offsetting those costs for people who cannot change their behaviour.

I draw the Minister’s attention to two issues. The first is the extent to which the differential for the new highest band, which the Chancellor announced in the Budget, will impact on behaviour, and how it will encourage more environmentally responsible choices. In his Budget speech, the Chancellor said:

“I want to do more to encourage cleaner fuels and cars. I propose to radically reform vehicle excise duty. I am introducing…a new band of £210 for the small number of new cars that are the most polluting”.—[Official Report, 22 March 2006; Vol. 444, c. 295.]

In a written answer the Financial Secretary gave the number of people who would be persuaded by that amazing new band to change their behaviour. As a result of these proposals, carbon emissions will fall by a fraction—less than 1 per cent. Therefore, our amendments seek to point out the incredibly limited impact that the Government’s proposals will have and to present ways in which they might like to achieve a more significant impact on behaviour. In this respect, people in rural areas, as well as in urban areas, will have the opportunity to exercise choice to offset those costs. When they are purchasing a new car they can decide, like people in urban areas, to buy a car with lower emissions. However, they cannot decide how much they pay for their fuel. That is the inequality that we seek to address.

I hope that the Government will at least recognise some of the difficult circumstances that many of my constituents and those of my hon. Friend and others in rural areas across the country face, and I hope that they are prepared to take on board the need to recognise their difficult circumstances. If the Minister does not wish to accept any of our proposals, I would be interested to hear how he plans to ensure that people in rural areas are protected from any further measures that the Government may plan to take in relation to fuel duty and vehicle excise duty that will significantly increase their transport costs despite the fact that ultimately they will have no alternative to the car and hence will have to bear those costs rather than change their behaviour to the benefit of the environment.

Rob Marris
I have to say that we are having a somewhat confused debate. The proponents of the motor fuel—[Interruption.] I want to offer some clarity to the hon. Member for Eastleigh (Chris Huhne), which Members of his party have signally failed to do. I will not address any remarks to new clause 6, but I shall speak to new clause 4 and the amendments. The hon. Member for Wycombe (Mr. Goodman) gave an interesting figure. He will correct me if I am wrong, but I think that he said that 29 per cent. of the population would be in a rural area.

20:45:00

Mr. Paul Goodman
It depends—[Laughter.] It depends on which of the two definitions of rural area one accepts. The Liberal Democrats have not been able to tell us which of the two they accept, so when they laughed, they were laughing at themselves.

Rob Marris
It will not surprise the hon. Gentleman to learn that I entirely agree, because I was using the only figure that has been cited in the debate, so far as I am aware.

Danny Alexander
The new clause makes it clear that the definition should be subject to Treasury regulations, but in answer to an earlier intervention I mentioned the Scottish Executive’s rural petrol stations grant scheme as a model that might be worth considering. The definition used in that scheme would apply to 5.37 per cent. of the population of Scotland. I hope that that point at least manages to inform the hon. Gentleman on one particular possibility that might well be adopted when the Treasury or civil servants come to look at this matter, because I am sure that his party will support the new clause.

Rob Marris
I am glad that the hon. Gentleman has come up with a figure, but for the moment I shall stick with the figure on which I have based my calculations, as it was the only one before us before that intervention.

There are approximately 20 million private motor cars on United Kingdom roads. I estimate that the average rate of vehicle excise duty is £150 a vehicle, based on clause 13. That would generate vehicle excise duty of approximately £3 billion a year. If we take 29 per cent. of that, that means that the Liberal Democrats are proposing, in round terms, an almost £1 billion giveaway.

Chris Huhne (Eastleigh) (LD)
It was made clear that the 29 per cent. figure referred only to Scotland, which represents a small proportion of the total UK. The hon. Gentleman cannot take the total UK car stock and then extrapolate from the Scottish proportion. As we have discussed in previous debates, the Countryside Agency uses a more robust definition of rurality that applies to England and Wales. This point highlights why it is important to give the Treasury the option through regulations to establish a definition that applies to the length of the UK. However, the hon. Gentleman cannot extrapolate in the way that he has.

Rob Marris
I apologise to the hon. Gentleman. I thought that his colleagues were moving an amendment to the Bill that would cover the whole of the UK, as provisions on vehicle excise do. Therefore, I based my calculations on the whole of the UK, and at least I have the guts to put forward some figures, which thus far he and his hon. Friends have not done. They are talking about a giveaway of approximately £1 billion, based on the 29 per cent. cited by the hon. Member for Wycombe. If we use the figure of 5.4 per cent., the giveaway is about £150 million—it is difficult for me to do that calculation in my head. They should at least put forward some figures.

Let us look at new clause 4. The hon. Member for Orkney and Shetland (Mr. Carmichael) did not seem to understand the mathematics of what I put forward in my intervention, so I am having to make a speech. New clause 4 would give the Treasury some power, but the hon. Members who support it will not indicate any way in which that power might be exercised, so I will make a suggestion. If they do not like the figures, they can come up with others. That way, at least we will then have some figures before us in this debate.

Page 13 of the Red Book tells us that excise duties in the UK raise £40 billion a year. If half of that comes from vehicles—excise duties come in from other sources, too—the amount is £20 billion. I suspect that I am making a conservative estimate of the proportion of excise duties that come from vehicles, but I will use it. If we take off the figure that I gave earlier as an estimate of the total UK vehicle duty, which was £3.3 billion a year, based on 20 million private vehicles and with an average excise tax disc duty of £150, that leaves us with £16.7 billion coming principally from fuel, and 29 per cent. of that is about £5 billion. New clause 4 does not give us any formula for by how much its supporters wish vehicle excise duty to be cut, but if it were cut by 50 per cent. in rural areas, that would amount to a £2.5 billion giveaway. On the only figures before us—others can put forward their own figures—these amendments would provide for a tax giveaway of getting on for £2.5 billion to £3.5 billion. That is a great deal of money. It is being said, cavalierly, “We cannot put any price on this. We have not looked at the figures and it is all up to the Treasury.” That is irresponsible in a debate on the Finance Bill. As ever, the Liberal Democrats are under-prepared. They have not done their homework.

Julia Goldsworthy
I was talking about some of the difficulties that people in remote rural areas may face when considering their transport options.

Rob Marris
Of course there are difficulties for people in remote rural areas. However, if we consider wealth generation in the UK, it comes principally from urban areas, especially London, where we are now situated, and the south-east. I represent a constituency in the west midlands.

A principled position is being put forward about helping people with their travel costs in remote rural areas. I understand that. However, Liberal Democrat Members refuse to set out any figures because they have not done their homework. The hon. Member for Falmouth and Camborne (Julia Goldsworthy)—she will correct me if I am wrong—has a reputation for bunking off from this place to go on sports programmes on television, and helicoptering around the United Kingdom. She then comes forward as a proponent of green taxes. In addition, she comes forward with vehicle excise duty proposals in amendments Nos. 124 and 129, which would cut vehicle excise duty and cut also green taxes. It is the most brass neck that I have seen in five years in the Chamber.

Mr. Carmichael
Perhaps the hon. Gentleman is a little jealous that no one has invited him on to such a programme.

Rob Marris
Were I to be invited on to such a programme, I would not participate. That is because I do not believe in moonlighting. I gave up my practice as a solicitor—where I made more money than I do in this Chamber—as soon as I was elected.

Julia Goldsworthy
I am sure that the hon. Gentleman would approve of the worthy cause—the money raised for charity, and the fee that I received from it, was donated to the Cornwall air ambulance, which is funded entirely from charitable donations and provides an essential service—

Mr. Deputy Speaker
Order. I think that it would be a good idea if we returned to the new clause that is before the House.

Rob Marris
I will do that, Mr. Deputy Speaker.

It just seems to me that helicoptering around the United Kingdom and then proposing green taxes in the proposals that are before us, which go against green taxes, is the height of hypocrisy and brass neck. On that basis, if on no other, I urge Government Members to vote against the proposal if there is a Division.

Stewart Hosie
I shall speak primarily to new clause 6, but I shall take up some points that arise from new clause 4.

The hon. Member for Falmouth and Camborne (Julia Goldsworthy) said that she was delighted to raise these matters again—I am paraphrasing—so as to spark debate. I was intrigued by the use of the word “again”. When we discussed a similar amendment last year, the Liberals opposed it. When we discussed these matters generally on the Floor of the House, the Liberals—

Chris Huhne
Ah ha.

Stewart Hosie
I think that I can finish the sentence without a strange Liberal “Ah”.

To come to the substance of the matter, in Committee on the Floor of the House, the Liberals, understandably because it is their policy, concentrated on vehicle excise duty rather than on fuel duty, an issue that was raised elsewhere.

Chris Huhne
The hon. Gentleman knows well that the debate last year arose from a general proposal from the Scottish National party to reduce fuel duty for  the entire United Kingdom. That was not something that we could conceivably support if we held any responsible attitude towards the burning of fossil fuels and the impact on climate change.

Stewart Hosie
I say to the hon. Gentleman with a straight face that the proposals from his party today will not stop the burning of fossil fuels. The cost of doing so would be reduced in rural areas, for very good reason.

Chris Huhne
The key point, which my hon. Friend the Member for Falmouth and Camborne (Julia Goldsworthy) made explicitly, is that the proposal is designed to be part of a package that will, taken in its whole, have a dramatic effect in providing a disincentive to the burning of fossil fuels, and therefore improving our contribution to tackling climate change. If we do not deal with the problems in rural areas, there will be a serious difficulty in using price incentives through fuel duty and through vehicle excise duty to tackle climate change. It is precisely to enable that process to go forward that we have put forward the proposals that are before the House. It is unfortunate, given the arcane rules of the House, that we are not able fully to debate the other parts of the package. However, as we know from—

Mr. Deputy Speaker
Order. I think that the hon. Gentleman should stop at that point.

Stewart Hosie
If the hon. Member for Eastleigh (Chris Huhne) chooses to get to his feet later, we know what his speech will be about.

The hon. Member for Orkney and Shetland (Mr. Carmichael), whom I like and admire, mentioned VAT on three or four occasions during his contribution on new clause 4. It is disappointing that new clause 4 does not use VAT gain to offset duty, which is my proposal. That is a sensible way around the problem, not least because a VAT windfall would not have a fiscal impact on the Treasury—it would minimise the gain, while not reducing the Government’s expected take.

New clauses 4 and 6 would allow the Treasury to define “sparsely populated rural areas”. The hon. Member for Fareham (Mr. Hoban) and I have referred to the various definitions, such as the sevenfold model, which can cover up to 90 per cent. of the population and up to 30 per cent. of the land mass. Those definitions are clearly inappropriate, and those outcomes are clearly not what the Liberal Democrats intended. If an offset or a straight reduction in fuel duty were to apply to sparsely populated rural areas, the Treasury should define it in statute.

There has been a great deal of discussion about derogation, which the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) has mentioned. We will not vote on new clause 4 tonight, which is disappointing because it may provide a way forward, and I hope that we can build a consensus on the issue.

New clause 6 addresses the ongoing problems caused by high fuel prices. Last year, a similar amendment attracted cross-party support and the support of the Road Haulage Association, and I am delighted to tell the Financial Secretary that the RHA welcomes new clause 6 today—if I hold up the RHA press release to the right camera, someone will take a picture of it. The press release states:

“Last year the Burns inquiry invested much time and effort in highlighting the plight of our industry and although we are still a long way from seeing a solution to the problem, it is encouraging to know that we have the support of the Scottish National Party. We shall now be pushing more strongly than ever to get the same recognition from our own Parliament; in particular the Chancellor of the Exchequer.”

John Healey
The hon. Gentleman may be interested to know that yesterday I met the RHA, the Freight Transport Association and Mr. Robbie Burns, not one of whom mentioned the SNP proposals.

Stewart Hosie
Perhaps they were overawed by the Financial Secretary. Roger King certainly welcomed our proposals today, and I would be delighted to forward the Financial Secretary a copy of the RHA’s press release.

The proposal would result in the introduction of a mechanism so that high oil prices would trigger lower fuel duty—fuel duties and VAT make up about 60 per cent. of the total price of a litre of petrol or diesel. In that case, the Chancellor would provide by statutory instrument that where the price of crude oil rose above the published forecast price, additional revenue from VAT on fuel would be applied to offset some of the rise in duty.

It will come as no surprise that the hon. Members who backed similar amendments last year represented rural and semi-rural constituencies, but it is not only those in rural constituencies in Scotland, Wales, Northern Ireland and parts of England who suffer from high petrol and diesel prices. No nation, no region and no part of the UK is exempt from the problem of rising fuel prices, because every product in every shop is carried on the road by a haulier at some point.

There has been a lot of banter in the Chamber about some of the proposals. I do not intend to make a lengthy speech, because it would be unfair on those hon. Members who have stayed in the Chamber and because the arguments have been rehearsed on many occasions. I hope that the Financial Secretary begins to take on board the serious manner in which we are tackling the grave concerns of the road haulage industry and especially the serious problems in sparsely populated rural areas. In some rural areas in my constituency, there are no filling stations between major towns and the nearest city. As one moves into the countryside, more and more independent stations find that they simply cannot continue.

21:00:00

I am unlikely to push new clause 6 to a vote. The parliamentary arithmetic would make that an unprofitable exercise. As I have done previously, I ask the Financial Secretary to take on board from the Road Haulage Association and the industry generally—the big companies and the small traders— the pain that has been suffered, the inflationary pressure building underneath because of high costs being driven up by haulage, and the problems of remote and rural Scotland and all sparsely populated rural areas in the UK. I ask him to make some positive noises in response to the debate so that we can look forward to a tempering of the high and spiking prices, which many of us experience in our constituencies.

John Thurso
I shall shortly consider cost and I hope to be able to provide some detail to hon. Members who have asked questions. I say that now so that they do not try to intervene before I reach that point in my remarks.

First, I shall comment briefly on new clause 6, about which the hon. Member for Dundee, East (Stewart Hosie) spoke. When I first read it, I had some sympathy with it but I soon decided that it was superficial sympathy. There are two fundamental problems with new clause 6 and the answer that he tried to provide.

First, the major disadvantage that my constituents and those of some of my hon. Friends suffer is the huge differential in price for diesel and petrol, which can range, depending on the cycle, from 6p or 7p at its most benign through an average of approximately 9p in the five years that I have been tracking the price to close to 14p in May 2003, which was the worst example. The problem is, as the hon. Member for Dundee, East admitted when I intervened on him in Committee, that his proposed system locks in the inequality. The price nationally would be held but the inequality would remain.

Stewart Hosie
It is true that the amendment that I tabled in Committee contained no specific proposal to alleviate rural prices. However, I specifically took on board the hon. Gentleman’s comments in proposed new section (1AB)(b) to the Hydrocarbon Oil Duties Act 1979 in new clause 6. That new paragraph refers to

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

I therefore hope that he will reconsider his previous sentence.

John Thurso
I am grateful for the intervention but it does not answer the question.

The second problem, which is fundamental, is that, if new clause 6 were accepted, the price of oil would be capped and there would be no opportunity to try to amend behaviour, as my colleagues wish, through taxes that give an incentive to those who have the opportunity to use alternatives in the form of public transport.

Stewart Hosie
Members of another party made that point in a previous debate. The point of using the windfall VAT to offset some of the duty rise is precisely that it does not impact on planned environmental increases. With the greatest respect, the hon. Gentleman has missed that point, too.

John Thurso
I am grateful to the hon. Gentleman for that explanation, but that is not how I read his clause, and I do not think that that is the effect that most observers and commentators envisage. However, I started by having some sympathy for his proposal, and he and I clearly share a desire to do the right thing. I suggest that his objective of getting rid of the inequality suffered by our constituents who live in remote areas would best be achieved by supporting new clause 4.

The problem is that we have become trapped by the wrong details and we are asking the wrong questions. The best approach would be to start by identifying the objective of the exercise. That objective is not to try to find a definition that fits; it is to identify the relatively small number of parts of the United Kingdom in which fuel is at such a premium that residents suffer great inequity. Let us look at that problem and design a scheme that addresses only that problem. All our discussions about whether to adopt formula X, Y or Z are irrelevant. New clause 4 would permit the Treasury to undertake the necessary work to address the problem. A number of schemes might fit the purpose, but the starting point should be to ask what we are seeking to achieve, and then to design the appropriate scheme.

I now want to address the question of cost. In January 2000, the Highland Council and Highlands and Islands Enterprise commissioned EKOS Ltd to produce a report on the scale of the problem. It stated:

“The total additional expenditures per annum on motoring by Highlands and Islands households, due to higher motoring costs as a whole, are approximately £88 million. This equates to approaching 3 per cent. of the region’s Gross Domestic Product. Of this, £17.8 million per annum is attributable to higher fuel prices, of which approximately £2.7 million is in the form of additional VAT paid because of the higher fuel prices in the region.”

If we wished to get rid of the premium—at an average of 9p—we could simply apply the 9p to those figures, and the cost to the highlands and islands would be no more than £3.5 million, allowing for inflation since 2000. That is a long way short of the £2 billion or £3 billion that has been suggested. In seeking to achieve our objective in the highlands, the Treasury would therefore have to bear the phenomenal cost of only about £3.5 million. If I extrapolate that calculation across similar areas using similar definitions, I estimate that the total cost for the United Kingdom would be no more than £20 million. But even if I am out by 100 per cent., and the total would be nearer to £40 million, that would still be a very small sum to achieve that objective. Furthermore, if the expenditure of £17.8 million that I have just described were diverted into general expenditure, we could create 592 full-time equivalent jobs in the highlands.

Another part of the equation that we need to consider is to be found in that same helpful report. It estimates that the average income in the highland area is much lower than in the rest of Scotland, and that prices are higher. Consequently, highland residents have 76p to spend on goods and services for every £1 that the average Scottish resident has. In other words, the average highland resident is about 24 per cent. worse off than those who live in the rest of Scotland. On top of that, they have to pay between 10 and 20 per cent. more for their fuel. That is the genuine burden under which my constituents and those of my hon. Friends labour. Hon. Members may not have visited the areas to which I am referring. I extend an open invitation to all of them to do so at any time. I can do that, because my constituency is so far away that I know very few will take advantage of the invitation. Nevertheless, they will all be welcome.

For many miles in those parts of my constituency there is no public transport of any kind. Where there is transport, it consists of a bus that travels in one direction on one day and travels back on the following day. That is not really a viable option. A car, or a private vehicle of some sort, is therefore an absolute necessity, particularly in much of rural Sutherland but also in many parts of Caithness. A real burden—real inequity—is suffered by people with the lowest incomes in the United Kingdom, and I think that reducing that burden is a worthwhile objective for us as legislators.

I commend new clause 4. It does not seek to impose regulation; it merely seeks to give the Treasury power to do so. When I last raised the issue, during a Westminster Hall debate in 2003, I argued for a derogation. That was because I had always been told by the Treasury that it could not take this action. The Treasury’s case was holed below the waterline when the French went and did it with the acquiescence and support of our Ministers. We need no longer ask “Can we do this or not?” We now know that we can, and the question has become “Why do the Government not do it?”

I am delighted to support the new clause. It gives the Treasury exactly the powers to deliver exactly the right solution at a very small cost to the taxpayer.

Mr. Alan Reid (Argyll and Bute) (LD)
New clause 4 is an enabling clause, which gives the Treasury power to specify lower rates of duty on fuel sold in remote rural areas. Accepting the new clause would allow discussions to begin; we could then decide exactly where lines should be drawn, and what the differentials should be. I urge the House to accept the new clause. It does not commit the Government to anything and it would not reduce the Treasury’s revenue, but it would allow a debate to start.

The sad fact is that fuel is sold in remote rural areas at a much higher price than in urban areas. People living in areas where there is no public transport alternative must pay far more for their fuel than those living in areas where there is such an alternative. Let me give some examples from my constituency to show how large the differentials can be. The difference between the cost of fuel on the islands of Mull and Islay and in, say, Glasgow is usually between 15p and 20p per litre. In the case of smaller islands such as Coll and Colonsay, the difference is about 30p per litre. That demonstrates the massive extra amount that people living on the islands must pay for their fuel. The additional cost has a damaging effect on the economies of those islands: not only does it have an impact on people’s daily lives, but it discourages people from starting or continuing to run businesses.

The remote communities in the highlands and islands have suffered years of population decline, which shows no sign of stopping. The high fuel prices are part of the problem: as I have said, they discourage people from opening and running businesses that create the jobs that will allow young people to remain in those remote communities. Encouraging people to stay in the remoter parts of Britain benefits the whole country. Every time the Government propose the building of tens of thousands of new houses in the south-east, Members of Parliament from that part of the country object. They should ask why market forces are pushing people towards it. The answer is that the cost of living in remote areas is becoming so great that the jobs are not there. Sustaining viable economic communities in remote parts of the country is beneficial to the country as a whole.

There is an environmental justification for high fuel taxes: that they encourage people to use public transport alternatives. That environmental justification, however, does not exist in remote areas where there are no buses, and where it would be environmentally nonsensical for councils to subsidise bus services because buses would run with only one passenger on board. There is simply no environmental argument in favour of high fuel taxes in rural areas.

Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op)
It would be helpful if the hon. Gentleman clarified which communities would benefit from his proposal. The definition appears to be based on there being no public transport. The area around Inverness, for example, has a good public bus service extending a good few miles around the town, so it would not be an obvious beneficiary.

21:15:00

Mr. Reid
Clearly, Inverness would not be a beneficiary. When my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) made the proposal, he was talking about Nairn, Badenoch and Strathspey rather than about Inverness.

Road pricing is, I believe, the long-term solution to the problem. We can fix charges for using roads in different parts of the country. For example, my constituents on the Isle of Mull have justifiable cause for complaint when they pay the same tax on fuel and pay more tax to the Treasury because of the higher rate of VAT. They pay more tax in order to drive on potholed single-track roads. It is scandalous that they have to pay more to travel on those roads than others pay to travel on well maintained motorways. Although road pricing is the long-term solution, new clause 4 provides the answer during the interim period before road pricing is introduced.

The Office of Fair Trading and other organisations, councils, enterprise companies and so forth have carried out investigations to find out why fuel prices are so high in remote areas. The general reason that always emerges is low turnover. It is argued that Tesco and Asda sometimes sell fuel at a loss in order to encourage people into their supermarkets to buy bars of chocolate and milk at inflated prices, but a small shop or filling station in a remote village or on an island does not have that option. There is a low turnover, but the fixed costs are the same, so the high prices result from that. The only way of bringing prices down is by reducing the element of taxation, which explains why we are proposing new clause 4 today.

As we have heard from other Members, EU countries such as Greece, Portugal and France have introduced a similar measure and have obviously found a way of making it work. I see absolutely no reason why it cannot be made to work in Britain as well. If we accepted the new clause, it would allow the Treasury to do some analysis and some arithmetic, to publish consultation documents and to provide impact analysis, which would allow us to decide exactly where the lines on the map should be drawn. I would certainly include all the Scottish islands.

Mr. Andrew Turner
Before the hon. Gentleman sits down, I would like to say that it would have been much better if the Liberal Democrat speeches had been delivered in reverse order—[Interruption.] Well, we would have been so much better informed at an earlier stage of the debate. Does the hon. Gentleman agree that many island residents find it difficult to justify paying national rates of vehicle excise duty when their cars never go on to the mainland?

Mr. Reid
The hon. Gentleman makes a very good point. Islanders have to pay vehicle excise duty, fuel tax and VAT. Indeed, if my constituents want to take their cars to the mainland, they have to pay a high fare to Caledonian MacBrayne, so the hon. Gentleman has made a valid point.

To sum up, I urge the Government to accept new clause 4, which would allow studies and further analysis to be carried out. The Government could later table the orders on which we could vote, allowing the burden of fuel duty on remote and island communities to be lowered. I would certainly include all the Scottish islands in the definition of a remote area. More detailed study has to be done in order to establish exactly where to draw the line on the mainland. Urgent action is required. We have had centuries of population decline, and unless drastic steps are taken I am afraid that that will continue.

Mr. Newmark
I was not expecting to speak in this debate, but I was once again inspired by the hon. Member for Wolverhampton, South-West (Rob Marris). I put it on record that I have tremendous sympathy for people who live in rural areas. In fact, I live in a semi-rural constituency. Many of my constituents, and especially those in the more rural areas, are feeling the effects of high energy costs. However, I have a problem with how rural areas are defined, as opposed to urban areas. The hon. Gentleman asked why poor people in rural areas should benefit more than poor people in urban areas.

Mr. Alan Reid
rose—

Mr. Newmark
If the hon. Gentleman will sit down, I shall make my point clear. I understand the problems faced by people in remote areas. I know that life there can be more expensive, but the same is true even in my semi-rural area. For example, people who live 15 miles away from the centre of Braintree have to pay higher fuel prices, for some strange reason. In those circumstances, how do we define remote? Various definitions have been offered in the debate so far. People in Caithness, Sutherland and Easter Ross are said to live in a remote area, and the hon. Member for Argyll and Brute—Bute, rather—said that people on the islands inhabit an even more remote area. However, people living in central London might regard Bromley and Chislehurst as remote.

Mr. Andrew Turner
Only the Labour ones.

Mr. Newmark
It is even more remote for the Liberal Democrats now. We will never be able to define what is remote and what is not. Who will play Solomon in respect of that very difficult question?

Sir Robert Smith
Why does the hon. Gentleman think that the UK is so feeble in its inability to understand the problems of remote rural areas, when Greece, Portugal and France understand them perfectly well?

Mr. Newmark
People define what they perceive as remote in their own way. The Liberal Democrats are not approaching the matter in the right way.

I turn now to the question of cost. Liberal Democrat Front-Bench Members told us that they had no idea of how much their proposal would cost. What a surprise—but then the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) came to the rescue and got his calculator out. He said that the cost could be £3 million or £10 million or £20 million. Are there any higher bids? Once again, the Liberal Democrats have not thought out the costs of their proposals at all.

Julia Goldsworthy
Will the hon. Gentleman concede that new clause is purely an enabling provision and so has no cost implications? Given that that is so, why does he think that the Government should choose to reject it?

Mr. Newmark
Call me a simple soul, but new clause 4 does imply a cost. I shall not rehearse the arguments offered by hon. Members on the Liberal Democrat Front Bench, but I am sure that they will back me up when I say that their proposal does represent a cost to the Exchequer.

John Thurso
Will the hon. Gentleman give way?

Mr. Newmark
Is the hon. Gentleman going to get his calculator out again?

John Thurso
I have no idea how to work a calculator. I was quoting from a report. The figure of £3.5 million that I gave pertained to the highlands, and was a maximum. For the benefit of the House, I extrapolated what that might be as a maximum for the UK. If the hon. Gentleman reads Hansard, he will find that what he said about my remarks is wrong.

Mr. Newmark
I should be surprised to find that what I said is wrong. Unless the hon. Gentleman produces a definition of what is remote, I do not know how he can come up with a figure of £20 million in his analysis.

I turn now to new clause 6, which would require the Chancellor to forecast oil prices. I cannot pretend that the right hon. Gentleman has any greater forecasting powers than Mystic Meg, and there is no evidence that his skills in that respect have been especially good in the past. It is ludicrous to expect the Chancellor to provide a forecast of oil prices. We should all be multimillionaires by now, especially the right hon. Gentleman, if we could actually forecast the price of oil over the next 12 months.

If the Lib Dems want to show their true green credentials, they should be figuring out a way to tax carbon emissions. How can one do that? I do not want to digress from the new clauses, but focusing on carbon emissions and charges on them, perhaps through vehicle excise duty—although not the modest premium added by the Chancellor—and seriously charging Chelsea tractors that emit huge amounts of carbon would have been a far more sensible way forward.

John Healey
We have had a lengthy debate on these proposals: nine speeches and four interventions. Clearly, the Chamber is not full of German and Italian football fans, but for those who have a passing interest, the score is still 0-0 after 65 minutes. However, I am told that it is an excellent game.

The hon. Members for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) and for Dundee, East (Stewart Hosie) introduced their new clauses in measured tones, but that did not disguise the flaws in their arguments. The hon. Member for Inverness, Nairn, Badenoch and Strathspey, who moved new clause 4, laid great stress on the price of fuel for those living in rural areas in his constituency, but it is important to remember that the costs of fuel and vehicle excise duty are just two of the many factors that contribute to the costs of motoring and the cost of living.

The cost of living varies from region to region across the country. The hon. Gentleman may like to consult the recent regional comparisons of the retail prices index published by the Office for National Statistics. The RPI for Scotland is 5.5 per cent. lower than the UK average, while the RPI for London is 9.7 per cent. above the UK average. The price of a pint of beer in London is significantly higher than elsewhere in the country, but we do not make tax adjustments to compensate for that.

Mr. Carmichael
Surely the hon. Gentleman accepts that the RPI is not uniform across Scotland as a whole. There are variations in significant price indicators in different parts of the country. It is much lower in places such as Glasgow and Edinburgh than in the remote rural areas that we have been discussing tonight.

John Healey
My point is that the cost of living and its components vary. Where the cost of a particular commodity is high, we do not necessarily compensate by making the sort of tax adjustments that the hon. Gentleman and his hon. Friends are advocating.

Danny Alexander
As the Minister knows from my earlier remarks, the reason for our proposals is that in rural areas, especially where there is no access to public transport, getting around by car is a necessity, not a choice. It is not a consumer choice in the way that going for a pint of beer in a London pub might be; it is essential for the future economic viability of rural communities. That is why there is a special case to be made.

John Healey
The Government recognise that, which is why we introduced the special rural transport fund to support the pressures and needs of rural transport. The hon. Gentleman may be interested in the fact that spending per head on transport in Scotland is 29 per cent. higher than in the rest of the UK.

My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) raised a couple of important points, one of which links to the point that I made just now and which he tempted me to make when he intervened. He said that, if the principle of uniform tax rates were changed, allocations for public expenditure would, inevitably, have to be reviewed, too. When that point was put to the hon. Member for Inverness, Nairn, Badenoch and Strathspey he said no, point blank. On that question, the Liberals want to have their cake and eat it.

The second major flaw in the proposal is that it is in conflict with the environmental objectives that we can pursue through vehicle excise duty and fuel duty. Clearly, the importance of environmental objectives applies equally to those who live in rural areas. If we follow the logic of the Liberal proposal, the cost of going green is not borne equally by everyone but borne in particular by those who do not happen to live in rural areas. Our policy on fuel duty is well established. The duty rates should rise each year at least in line with inflation, as we seek both to meet our targets to fund essential public services and our obligations to tackle climate change.

21:30:00

Julia Goldsworthy
If the Financial Secretary’s view is so strong on national fuel duty rates, why did the Government support the derogation for France?

John Healey
Let me correct the hon. Lady. She will be well aware that the UK’s policy is not to interfere in the fiscal decisions of other member states. We therefore did not support the French, but we did not oppose them, when they made their proposal for reduced regional rates. I hope that that helps the hon. Lady.

Mr. Carmichael
The Financial Secretary has told me in the past that what France has done could not be done. Does he now accept that he was wrong?

John Healey
Let me correct the hon. Gentleman. France has not yet done this. The proposal is due to be introduced in 2007. In fact, what the French are proposing—it would be interesting to find out whether the Liberals will propose it as well—is a real increase in fuel duties that could be offset in certain regions at that point.

The policy that we have established on fuel duty must take account of all the relevant economic, social and environmental factors, but, of course, it is important that fuel prices are no higher than they need to be. On prices, it is important that we are clear about what is driving the level and volatility of our fuel prices. Road fuel duty is lower in real terms now, at 47.1p per litre, than in 1999, when it was 47.21p per litre. That is the equivalent of a fall in the price of road fuel of 7p per litre. So the high and volatile prices are a problem not of fuel duty, but of the international market and international prices. The best way to deal with international prices is not by imposing the complex mechanisms that are proposed in new clauses 4 or 6, but by the efforts that we are making to support the efforts of producing countries and consuming countries to increase the stability of the oil market and to improve its functioning.

Sir Robert Smith
The Financial Secretary says that he is trying to solve the problem by improving stability in the production of oil and gas. Therefore, will he ensure that the Treasury does not cause any fears to investors about the production of oil and gas in the UK? If we lecture all the other producing nations to maximise their production, we must maximise our production as well.

John Healey
I would take the hon. Gentleman’s intervention more seriously if he had been present during the debates on the Bill about the changes that have been made to the regime and its possible impact on investment and exploitation. In short, the mechanisms proposed in new clauses 4 and 6 would introduce significant complexity but do little to bring greater stability to the UK market.

I thought that we had been through the issue raised by the hon. Member for Dundee, East in previous debates. The hon. Member for Wycombe (Mr. Goodman) is nodding his assent. In fact, we have been through that issue. New clause 6 is based on the central, important misconception that high fuel prices lead to an overall increase in VAT receipts—what the hon. Member for Dundee, East describes as a windfall in VAT—but that is not necessarily the case. When people have to spend more on one commodity, they tend to spend less on others, so the overall amount of VAT receipts usually remains unchanged.

Stewart Hosie
The Financial Secretary knows that we are talking about the VAT on petrol, not the rest of the VAT take, and there was no criticism or argument when we used the example last year that a 6p rise, from 80p to 86p, would have led to a 1.2p reduction or offset in the additional VAT collected. Those figures seemed to be widely recognised last year, and I hope that he will agree that the offset model would at least work and not have a fiscal impact on the forecast yield to the Treasury.

John Healey
No. The hon. Gentleman’s problem is this: if people are spending more because the price of fuel, including the VAT element, is higher, they will tend to spend less on other commodities on which VAT is also charged. The overall yield for VAT is usually unchanged. There is no windfall VAT gain through higher fuel prices.

UK vehicle excise duty and fuel duty rates are set at the current rates for very good reasons: first, to raise revenue to fund essential services and secondly, to help to achieve our environmental objectives and obligations. Those reasons apply equally to rural areas. We are seeing the worst of the Liberal Democrats—they are facing two ways at once. Their leader promises to hit people with an £8 billion rise in environmental tax. That is on top of the £12 billion that he needs to raise through increases in other taxes. They are suggesting a top rate of VED that is 10 times the current rate. Then, in this debate, they are advocating a cut in VED for certain special areas in which they have a special interest.

Apart from lacking a convincing intellectual or principled case for the amendments, introducing a separate rate of VED for remote rural areas would also create obvious problems with fraud and administration. A moment’s reflection would bring hon. Members to realise that. Clearly motorists could register vehicles in the designated remote areas while using the vehicles exclusively or largely in urban areas. Of course, that is going to be a problem. In Committee of the whole House, the hon. Member for Falmouth and Camborne (Julia Goldsworthy) quoted the Countryside Agency. If she looks at its figures in other respects, she will see that, in sparsely populated areas, about one in 10 houses are second homes or holiday homes. Inevitably, we would have that problem.

The amendments and new clauses are undesirable, unwelcome and unworkable. If new clause 4 is pressed to a vote, I urge my hon. Friends to oppose it.

Danny Alexander
I shall not detain the House for long. We have had an interesting debate. The points that have been made by my hon. Friends make a sound case for pressing the new clause to a vote. From my point of view, the various attempts to pronounce the name of my constituency were the most interesting aspect of the remarks made from the Labour and Conservative Benches. I will award marks out of 10 later. The arguments against the measure do not hold water, so I would like to press the new clause to a vote. 

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

Division 275
04/07/2006 21:37:00
The House divided:
Ayes: 60
Noes: 297
Question accordingly negatived.

New Clause 9

Energy efficiency and water conservation: fiscal and economic report

‘(1) The Chancellor of the Exchequer must, within one year of the passing of this Act and annually thereafter prepare and publish a report on such fiscal measures he considers appropriate to assist with—

(a) energy efficiency; and

(b) microgeneration; and

(c) small scale local energy generation;

(d) the conservation of water by householders.

(2) In preparing the report under subsection (1), the Chancellor of the Exchequer shall take reasonable steps to consult local authorities and such persons as in his opinion have an interest in—

(a) enhancing the United Kingdom contribution to combating climate change; and

(b) alleviating fuel poverty; and

(c) conserving supplies of water.

(3) In this section—

“microgeneration” has the same meaning as in section 82 of the Energy Act 2004;

“small scale local energy generation” means generation of energy—

(a) in the case of electricity, generation by plant not exceeding 20 megawatts, and

(b) in the case of heat, production by plant not exceeding 100 megawatts thermal.’.—[Alan Simpson.]

Brought up, and read the First time.

Alan Simpson (Nottingham, South) (Lab)
I beg to move, That the clause be read a Second time.

Mr. Speaker
With this it will be convenient to discuss the following:

New clause 10—Energy efficiency: lower rate of stamp duty land tax—

‘(1) The Finance Act 2003 (c. 14) is amended according to the provisions of Schedule—(Stamp Duty Land Tax: lower rate for certain measures).

(2) The Schedule (Stamp Duty Land Tax: lower rate for certain measures) has effect.’.

New schedule 1— Stamp duty land tax; lower rate for certain measures––

‘Schedule 

Stamp Duty Land Tax; lower rate for certain measures

21 After section 92 of the Finance Act 2003 insert—

“92A Lower rate where notice given relating to specified measures

(1) This section applies where—

(a) the purchaser is liable to pay the tax in respect of a chargeable transaction,

(b) the relevant land consists entirely of residential property, and

(c) the purchaser has given notice of an intention to undertake or to have undertaken relevant specified measures within the relevant period.

(2) Where this section applies, regulations shall prescribe a lower rate of tax chargeable in respect of the transaction, and different lower rates may apply to the undertaking of different relevant measures.

(3) The lower rate in regulations under subsection (2) may be expressed as—

(a) a percentage of the chargeable consideration,

(b) a percentage of the amount of the tax in respect of the chargeable transaction that would be payable if this section were not to apply, or

(c) a specified monetary reduction in the amount of tax payable.

(4) In determining the lower rate in regulations under subsection (2), the Treasury shall have regard to—

(a) any energy efficiency aims for residential accommodation designated under section 2 or 3 of the Sustainable Energy Act 2003 (energy efficiency in residential accommodation: designation by Secretary of State and by the National Assembly for Wales), and

(b) the duty of the Secretary of State under section 217(1) of the Housing Act 2004 (duty in relation to increase in energy efficiency of residential accommodation in England), and

(c) the microgeneration strategy published pursuant to section 82 of the Energy Act 2004; and

(d) the need to conserve water.

(5) Notice for the purpose of subsection (1)(c) shall be given in writing in such terms as may be prescribed by regulations.

(6) Regulations shall—

(a) prescribe ‘relevant specified measures’ for the purposes of this section, and

(b) specify the extent to which the lower rate prescribed under regulations under this section is payable in relation to different specified measures undertaken.

(7) The prescribed definition under subsection (6) shall include—

(a) measures to improve the thermal insulation of the property,

(b) other measures to improve the energy efficiency of the property,

(c) the installation of microgeneration measures,

(d) the installation of water saving measures.

92B Arrangements in relation to lower rate under s. 92A

(1) Where section 92A applies, regulations may require a person or body other than the purchaser to retain the relevant amount until a decision is made that the relevant specified energy efficiency measures have been undertaking by or on behalf of the purchaser.

(2) Regulations may prescribe the person or body that is to decide whether or not the relevant energy efficiency measures have been undertaken.

(3) Any such decision must be taken within, or as soon as practicable after the relevant period.

(4) Where it is decided that the relevant specified measures have been taken within the relevant period, the relevant amount, and any interest payable on it, shall be paid to the purchaser.

(5) Where it is decided that the relevant specified measures have not been taken within the relevant period, the relevant amount, and any interest payable on it, shall be payable in the same manner as the tax.

(6) Interest payable under subsections (4) and (5) shall be determined in accordance with the provisions of section 87.

(7) Regulations may amend Schedules 10 and 12 so as to provide for—

(a) the making of returns in relation to the provisions of section 92A and this section and regulations made under them,

(b) duties to keep and preserve records in relation to those provisions and regulations,

(c) appeals against decisions under those provisions and regulations, and

(d) the recovery of relevant amounts and interest payable on them.

(8) The powers to make regulations under section 92A and this section are exercisable by the Treasury.

22 In section 92A and this section—

“the relevant amount” means an amount that is the difference between—

(a) the amount of the tax in respect of the chargeable transaction that would be payable if section 92A were not to apply, and

(b) the amount of tax in respect of the chargeable transaction that is payable under section 92A;

“the relevant period” means a period to be specified in regulations beginning with the date on which the tax becomes payable.

23 In section 114 (orders and regulations made by the Treasury or Inland Revenue), in subsection (4), at the end, insert “paragraph 9A(1) of Schedule 19 (commencement of sections 92A and 92B.”

24 In Schedule 19 (Stamp duty land tax: commencement and transitional provisions), after paragraph 9, insert—

“Commencement of sections 92A and 92B

9A. (1) Sections 92A and 92B shall come into force in accordance with the provisions of an order made by the Treasury.

(2) No order may be made under sub-paragraph (1) before the coming into force of section 155 of the Housing Act 2004 (duty to have a home information pack).”.’.

Alan Simpson
The provisions have been tabled by members of all parties represented in the House, and if you will allow me, Mr. Speaker, I shall speak to new clause 10 and new schedule 1 as well as to new clause 9. 

New clause 9 makes the revolutionary proposal that the Chancellor submit to the House an annual report on fiscal measures—and their success—to assist with energy efficiency, microgeneration, the development of local energy systems and water conservation measures, all of which are the subject of Government policies and targets. However, there is a gap between the wish to deliver those targets and the way in which we do so.

It could be argued that it is not necessary to require the Chancellor to make such a report to the House. After all, in section 82 of the Energy Act 2004, which sets the basis of a Government policy promoting the development of microgeneration systems, there is a duty to report. Under the Climate Change and Sustainable Energy Act 2006, which was wonderfully piloted through the House by my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz), a duty will follow for the Department for Environment, Food and Rural Affairs and the Department of Trade and Industry to report, one on climate change and the other on the sustainable energy implications.

It is worth noting that both those Acts started out with a presumption that there would need to be a Treasury reporting role addressing the fiscal measures that were necessary to make the policies work, but in order to get both Acts on the statute book, the Treasury required itself to be excluded from the reporting process. That leaves an enormous hole in the coherence of Government plans for tackling climate change and the delivery of sustainable energy strategies. How can we exclude fiscal measures from the sustainability programme, when they are at the very centre of it?

In Germany the Government have transformed the energy market through an inversion of the fiscal rules that govern that market, so that microgeneration becomes the norm in developments, rather than being stuck on at the end. Elsewhere, particularly in Denmark and the Netherlands, fiscal measures have been used to promote the development of decentralised energy systems in ways that will offer a new approach to energy security in the 21st century.

My argument is that for us in this country, this Parliament and this Government it is not coherent to talk about joined-up government if we suggest that fiscal measures, and a Treasury lead on those measures, should be the exemption clause in our overall sustainable energy strategies. Everyone knows of the Prime Minister’s support for renewable energy, and the DTI estimates that 40 per cent. of UK energy needs could be met by decentralised energy by 2050. The difficulty is that no one seems to know how we get from where we are now to where we would like to be in 2050—at least, not without a clear fiscal lead that comes from the heart of Government and the heart of the Treasury.

Every Budget report since 2002 has made reference to energy efficiency and the reduction of carbon emissions. Every Budget has brought with it some measure relating to domestic energy efficiency or microgeneration, but in most cases those have been limited to VAT adjustments or enhanced capital allowances. Fiscal measures have been small scale, piecemeal and unconnected to an overall Government strategy. A specific duty would allow us to develop such a fiscally strategic approach to how Britain will meet its climate change challenge and its fuel poverty targets in the 21st century.

It is not that we do not know the scale of the problems that we face. It is just that we do not engage with the scale of the solutions that we need. Let me put that in context. From the figures provided to us by DEFRA, we know that carbon emissions over  recent years have started to increase again and are 158.4 million tonnes a year. Of that, the domestic contribution to increasing carbon emissions has risen to 41.2 million tonnes a year.

Fuel poverty is also back on the increase. The last figures that we have before Labour came to power are those for 1996, when 5.1 million people were officially recognised as living in fuel poverty in the UK. By 2003, a succession of Labour Government programmes had reduced that figure to 1.2 million. By 2005, however, the number of households was back up to 2.2 million, and the projection for this year is sitting at around 3 million households now living in fuel poverty.

Why have the numbers started to increase? One simple set of figures speaks volumes—those for the change in energy prices. Between January 2003 and March 2006, average gas prices in the UK increased by 57 per cent. and electricity prices by 37 per cent. Therefore, increasing energy prices are pushing more people back into fuel poverty than our Warm Front programme is able to take out of it.

22:00:00

Mr. Peter Bone (Wellingborough) (Con)
Does the hon. Gentleman agree that part of the rise in prices for consumers that has affected poverty is accounted for by the fact that the EU has not fully liberalised the gas market in continental Europe, and that has added £186 a year to the cost for an average family?

Alan Simpson
No, I do not agree. One of the problems that we have in the UK is that we are now paying the price for the way in which we have sought to liberalise our energy markets. I have taken the trouble to ask most of the energy suppliers in the country to tell me what their long-term plans are for selling people less energy, and encouraging less energy consumption. Not a single one can do that. They just look at anyone who asks that question as if they were barking mad. Yet they know that we cannot continue to live in a world where we consume ourselves to death through the energy inputs that are responsible for the climate change outputs that devastate the rest of the planet. We will have to move to a different way of thinking about energy use and energy generation.

The difficulty is that when one asks the energy suppliers why they cannot make that move, even though intellectually they can understand the necessity of it, they say that they are required to engage in a market driven by short-term price considerations. How to break out of that short-term trap is one of the biggest challenges that we face, not just in this House but in this society. That is why we need a Treasury lead and a coherent fiscal strategy for how we set about delivering on our sustainability policies.

At the moment, 10 million people in the south of England face a hosepipe ban. In addition, millions of others are being warned of long-term water shortages that will be part of the cost and consequences of the climate change damage that we have done during the past 30 years. It is inconceivable that the public will allow us to go far down a path that ignores those issues, or excludes them from being at the heart of our Budget thinking about how we manage the economy. Putting that at the heart of our thinking, rather than having responsibility devolved into a series of separate, often unconnected and at times conflicting departmental policies, adds to the weight of argument about why there needs to be a Treasury lead—a Chancellor’s lead—in addressing the issue head-on.

New clause 10 and the schedule attached to it is the one specific proposal that would allow for the introduction of a lower rate of stamp duty or a rebate for the introduction of energy efficiency measures. In support of that I want to cite a number of points. Members should just cast their eyes over early-day motion 214, which was submitted by my right hon. Friend the Member for Rother Valley (Mr. Barron). It has 262 signatures from Members of all parties in the House, and it makes precisely the point about the need for a stamp duty rebate tied to the introduction of energy efficiency measures in the home.

Just over a week ago, the Energy Saving Trust and the Policy Studies Institute held a seminar for virtually all sectors of the energy industry, along with environmental and fuel poverty organisations. Officials from both the Department for Environment, Food and Rural Affairs and the Treasury were also present. Those at the seminar considered a long list of proposals about the sort of fiscal measures that would effectively promote the introduction of energy efficiency in the home. The single measure that emerged as by far the most popular way of achieving that was the introduction of a stamp duty rebate. It is important that we acknowledge the weight of pressure that people who are in the business of making things work feel that we could achieve if we wanted to make that happen.

Mr. Frank Field (Birkenhead) (Lab)
Does my hon. Friend accept that he would simply be developing existing Government policy? In our inner-city areas in which sales needed stimulus, the Government gave stamp duty exemptions, and the policy was successful.

Alan Simpson
I had forgotten about that point, so I am grateful to my right hon. Friend for reminding me of it. He is absolutely right to say that I tabled this measure in support of Government policy, rather than in opposition to it.

Let me give the clearest example that I can offer. In our energy White Paper, the Government made a specific commitment by setting a target that 4.5 million of the homes with cavity walls should be fully cavity wall insulated by 2010. At present, there are about 9 million homes with cavity walls throughout the UK. Each year, about 80,000 of those homes become fully insulated. If we were to deliver on our programme by 2010, there would have to be a sixfold increase in the rate at which the existing policy is working.

How do we deliver such a sixfold increase? When we talk to people in the industry and the relevant sectors, they point out that by and large, the most successful time for intervention is when people are moving house. When people are in the process of buying a new home or trying to sell their existing home, they examine what they have to sell and consider what they want to buy. At that point, stamp duty is a significant financial consideration for many such people. If we could tie rebate measures into delivering the strategies and policies that we have set out our stall to carry out by 2010—without looking for new ones—we might deliver what we promised.

There would be not only a big environmental plus to that, but a big creditability plus. There is nothing worse for the credibility of Parliament and Governments than making promises but failing to deliver on them. I am proposing a simple measure, and almost everyone in the industry is saying, “Give us this mechanism and we’ll deliver the outcomes that you in Parliament say you want.” The proposal has the support of the Energy Saving Trust, the Royal Commission on Environmental Pollution and the House’s own Environmental Audit Committee.

Mr. Frank Field
Given my hon. Friend’s normal stance, is there not some originality in his position of encouraging the Treasury Bench to adopt and support a market-led solution?

Alan Simpson
That might tempt me to re-think my position. I accept that there is important validity in what my right hon. Friend says. My explanation cum defence is that I have always said that there is nothing moral about markets. Left to their own devices, markets are entirely amoral. They acquire a morality only if politicians and political leaders of the day have the courage to deliver a moral framework. Since we have said this in our policies and set this out in our targets, why can we not say it in the measures on which we seek to deliver? I hope that the House will have the courage to do so.

Mr. Paul Goodman
The House owes a debt to the hon. Member for Nottingham, South (Alan Simpson) and to all his accomplices, if that is exactly the right word, for enabling us to debate microgeneration, energy efficiency and sustainability under the terms of the Finance Bill. Indeed, as the hon. Gentleman emphasised, those accomplices come from all parts of the House, and include my hon. Friend the Member for Buckingham (John Bercow), who is in his place.

I will set out why the official Opposition intend to support new clause 9 if it is to be pressed to a vote, but why we do not feel, as matters stand, that we can support new clause 10 and new schedule 1, which are grouped with it. As for new clause 9, the right hon. Member for Birkenhead (Mr. Field), in his characteristically mischievous way, set out exactly why the Opposition would be likely to look on the new clause favourably. He referred, if I can read my scribble, to a market-led solution, which is exactly what the hon. Member for Nottingham, South has proposed.

New clause 9 is rather more modest because it merely asks that the Chancellor should, within a year, produce a report on “fiscal measures” that would assist

“energy efficiency...microgeneration…small scale local energy generation”

and the

“conservation of water by householders.”

It asks also that in producing his report

“the Chancellor…shall…consult local authorities and such persons”

that

“have an interest in…enhancing the United Kingdom contribution to combating climate change…alleviating fuel poverty and conserving water supplies.”

To the Opposition, that seems to be a sensible and balanced way of speeding up the plans that the Government announced in March to increase local level energy production and to reduce carbon emissions. I suspect that many Members across the House share that view. The direction of travel outlined in the microgeneration strategy in March is welcome but it does not go far enough, so we believe that new clause 9 is helpful in pushing those plans forward.

After eight years, Ministers are still reviewing planning policy and debating the potential of microgeneration technologies. The new clause is a positive response to the exciting potential of emerging microgeneration technologies. A most serious and robust strategy should have been an integral part of the energy review, not a precursor to it. Rather than laying down a challenge to the industry, we believe that the Government are following in its wake. Rather than setting the international pace, they are reacting to developments abroad. As it stands, the strategy will do little to address the sizable advantage that our international competitors enjoy in this sector or make a meaningful impact on carbon dioxide emissions before 2010.

I mentioned economic growth on the one hand and environmental gain on the other, because the two go hand in hand. The choice for the future is not between slower growth and lower emissions and faster growth and increased emissions. As the hon. Member for Nottingham, South said, between the option of either a highly centralised and extremely wasteful energy system in which power is, in effect, monopolised in the hands of a few producers, or a more decentralised and energy efficient system in which power generation is put into the hands of households and consumers lies an energy market in which other countries are leading the way. By the end of 2004, 200,000 Japanese homes had fitted photovoltaic cells, while 300,000 micro-renewable systems have been installed in Germany. As the hon. Member for Nottingham, South said, Germany is one of the countries that is giving a lead on such energy generation. More than 10 per cent. of householders in Sweden already use micro-renewable technology to heat their homes. Furthermore, the global market for new energy products and services, including micro-renewables, may be worth trillions of pounds over the course of this century. German companies already generate half the entire turnover of the global wind industry, while Japanese firms are at the forefront of fuel cell and hybrid engine technologies. American companies are leading the way in bringing affordable renewable technologies to the market. That is why my hon. Friend the Member for Tatton (Mr. Osborne) recently visited silicon valley to examine the work of pioneering green companies, which are building on ideas coming out of Stanford university.

22:15:00

I concede that new clause 9 will not in itself make our micro-renewables sector more competitive or have a serious short-term impact on reducing emissions, but it has the potential to allow the Chancellor to return to the House in due course and on a regular basis with not only a series of fiscal measures and incentives, but a framework within which those measures should fit. My hon. Friend the Member for Tatton set out that framework in three parts shortly before his visit to silicon valley.

First, the Government should consider how the planning system might take into account the benefits of micro-renewables while also recognising the need to protect the local and wider environment. As hon. Members know, the planning system is not always friendly to micro-renewables.

Secondly, the Government should address the lack of information available to consumers. We need a clear and stable policy for micro-renewables, so consumers can make long-term predictions whether the cost of fitting a wind turbine or solar panel makes financial sense.

Thirdly, the Government must tackle the inadequate infrastructure and regulatory framework. As well as the need to buy less electricity, part of the attraction of micro-renewables is the potential to make money by selling any excess electricity back into the national grid. In summer, for instance, photovoltaic cells—this comment is apposite given the current weather—may well generate more electricity than a household needs, especially if the occupiers are away on holiday. At the moment, however, that is being made much too difficult by inadequate infrastructure and burdensome regulations.

I would doubtless go wide of new clauses 9 and 10 if I were to describe in detail how the national grid is largely configured for one-way energy flows, but we would like to see the grid operate more flexibly, which is why my hon. Friend the Member for Tatton has asked the quality of life policy group to examine the experiences of other countries that have introduced feed-in tariffs.

In summary, we shall support new clause 9, since it makes a sensible and practical proposal which is enactable now. Since we will produce our own proposals in due course on the fiscal framework in relation to microgeneration and energy efficiency, we will not support the tax cut in new clause 10 and new schedule 1. I am sorry to disappoint the hon. Member for Nottingham, South in that regard, but if he presses new clause 9 to a vote, we will certainly support him.

Julia Goldsworthy
The Liberal Democrats sympathise with what the hon. Member for Nottingham, South (Alan Simpson) is seeking to achieve with new clause 10 and new schedule 1.

I want to refer to early-day motion 214, which has attracted nearly 270 signatures and which relates to new clause 10. The hon. Member for South-West Bedfordshire (Andrew Selous) has added his name to it, so I shall be intrigued to see how the Whip on the Finance Bill advises his troops to vote.

New clause 10 would add complication to the stamp duty system, if the discounts were to operate in the same way as the already complex slab system. Furthermore, I am not sure whether I would be happy to subsidise improvements, environmentally laudable as they may be, to the home of the right hon. Member for Witney (Mr. Cameron).

It is a good opportunity to press the Government on how they intend to improve environmental standards in existing buildings. Like, I am sure, many other hon. Members, I look forward to the Financial Secretary’s response. However, I have a couple of queries about enforcement.

I understand that, if people say at the point of purchase that they wish to undertake improvements, they would qualify for a lower rate of stamp duty. However, what would happen if they did not carry out the improvements? Furthermore, with the Government proposing many plans to build many new houses, what incentives will there be to ensure that environmental measures are included when they are built?

Alan Simpson
The hon. Lady’s initial questions were legitimate but matters were left open because it would be for the Chancellor and the Treasury to set a framework. It is inappropriate to try to nail everything down in the new clause—it does not try to do that.

The process of operating a rebate is relatively simple. The Chancellor and the Treasury would devise the criteria against which a rebate could be claimed. One would define a period in which the works were to be undertaken and the process of reclaiming. There would therefore be a straightforward process of compliance. There are technical details to iron out but the problem is simply whether one wants to choose what I have described as an intervention point and whether one believes that it would work.

Julia Goldsworthy
I thank the hon. Gentleman for that clarification.

New clause 9 highlights many of the issues that I raised on Second Reading about the strategy for dealing with environmental measures—or its lack— in the Budget and the Bill, even though, in the week of the Budget, the Chancellor described lack of action on the environment as a scar on his conscience. New clause 9 tries to make explaining the strategy a requirement.

Clearly, we have a fundamental problem. As the hon. Member for Nottingham, South pointed out, emissions are rising. Between 1997 and 2004, carbon dioxide emissions rose from 150 million tonnes to 158 million tonnes, of which domestic carbon dioxide emissions now account for 41.2 million tonnes. That figure, too, is increasing. There is a problem that must be tackled and the Government are not dealing with it at the moment. 

Whatever action the Government are taking, there is no shortage of words and consultation. The Treasury has spoken plenty of fine words. The Budget report of 2002 states:

“The Government recognises that energy-efficiency improvements by the domestic sector are key to reducing fuel poverty and carbon emissions”.

The Budget report of 2003 states:

“The Government recognises that energy-efficiency improvements in the domestic sector are key to reducing carbon emissions and alleviating fuel poverty.”

The Budget report of 2004 states:

“The Energy White Paper highlights the key contribution that energy efficiency can make to the Government’s energy policy goals.”

The Budget report of 2005 states:

“Improving energy efficiency is the most cost-effective way of reducing greenhouse gas emissions and reducing the costs of fuel bills.”

In addition, there has been plenty of consultation. In 2002-03, there was consultation on the economic measures to improve domestic energy efficiency. In 2003-04, further consultation took place on those measures and, in 2004-05, stakeholder consultation took place on green landlord schemes to improve energy efficiency in the private sector.

The Government and the Treasury have also made several proposals. In 2002, they introduced enhanced capital allowances for investment in heat pumps, air heaters and solar heaters and a 5 per cent. VAT rebate on grant-funded installation of factory insulated hot water tanks, micro-combined heat and power and renewable energy heating systems. In 2003, there was an additional consultation on specific measures. I could go on. However, the list ends in 2006, with the allocation of an additional £50 million to the low-carbon buildings programme.

Of course, those changes are welcome but they hardly constitute a strategy. They are piecemeal. They encourage energy efficiency but only among a small number of people. Most householders will not be affected. We therefore need a strategy that means that the improvements will have an impact on a much wider group of people.

The Department of Trade and Industry’s own microgeneration strategy and low-carbon building programme consultation identified the wider benefits that microgeneration could bring. It showed that a clearer strategy would have the benefit of reducing carbon dioxide emissions as well as creating a series of other positive impacts on the people who would benefit from the improvements. The renewables innovation review suggests that buildings contribute about 47 per cent. of such emissions, and microgeneration has the potential to reduce that figure.

The DTI’s consultation paper also suggests that microgeneration would help to ensure reliable energy supplies, because its widespread use would reduce the load on the distribution network. More diverse local generation would also reduce transmission losses and, if deployed on a widespread scale, would help the UK to avoid becoming over-dependent on energy imports. Furthermore, microgeneration would help to promote competitive markets by introducing an additional aspect to the energy markets, giving people a wider choice of products from which to obtain their electricity and heat.

Microgeneration would also offer the opportunity for affordable heating for all. Many people in my constituency face fuel poverty but do not have access to gas, so their only option is to install oil-fired central heating. Microgeneration would be a more environmentally friendly alternative and a more cost-effective way of tackling fuel poverty.

For all those reasons, I welcome new clause 9. It represents a clear way for the Treasury to set out a strategy on this issue. It would have no financial implications and I will have no problem in supporting it. I shall also encourage my colleagues to do so, and I hope that the Minister will take the same approach.

Joan Walley (Stoke-on-Trent, North) (Lab)
I shall speak only briefly on new clause 9. In response to the hon. Member for Wycombe (Mr. Goodman), I regard myself not as an accomplice but as part of a team that needs to drive through the agenda for tackling global warming. I congratulate my hon. Friend the Member for Nottingham, South (Alan Simpson) on ensuring that we have an opportunity to debate this most pressing issue in our deliberations on the Finance Bill. My only hope is that everyone understands these issues and that we can gain the support of the nation for these proposals on a similar scale to the support that they give to what happens on the football pitch. It is critical that these matters should be debated not only here in Parliament but right across the country.

I have just two questions on these proposals for my hon. Friend the Financial Secretary. What are we waiting for? How can we move more quickly? I was encouraged by the comments made about these proposals by my right hon. Friend the Secretary of State for Environment, Food and Rural Affairs to the all-party group on the environment earlier this evening. He said that he intended to put environmental issues centre stage, and that he was taking the lead at DEFRA to enable all Government Departments to play their part in tackling global warming. I desperately want the Treasury to do even more than has already been done to make progress.

We have to ensure that we meet our targets, and to do that we must drive forward this agenda at national and local level. The Government have done a certain amount of reporting so far, but they could do more. New clause 9 will not cost the earth. It simply asks for an annual report from the Treasury so that we can have an informed national and local debate on the fiscal measures needed to speed up energy efficiency and introduce systems for microgeneration, small-scale energy generation and the conservation of water. That would signal to local authorities that they, too, were part of the team, and that their work in the local strategic partnerships was important in this regard. When the Environmental Audit Committee visited Woking, we saw the work that had been done there. Admittedly, it had perhaps been done on the basis of market initiatives rather than of environmental concerns, but it had nevertheless been done. We have also seen the work that has been done in Nottinghamshire. It is important that local authorities should be part of the UK’s collective effort to address climate change. I do not see why we should not all sign up to that as quickly as possible—hence the important debate that we are having now.

22:30:00

Let me say something about energy efficiency. My constituency has very low standards of heating and insulation, and a very high incidence of fuel poverty. The Government are spending a massive amount on initiatives to improve health through warmth. They should take great credit for improving building regulations, and for seeking to make improvements through the code for sustainable homes. However, as our Environmental Audit Committee’s report on sustainable housing points out, even more could be done. The steps that the Government have taken could be greatly reinforced by a review of fiscal measures, as paragraph 50 of our report explains.

We should take each and every opportunity to promote microgeneration, but we will need capital grant assistance to promote such technologies and help low-income households to benefit. The new Department for Communities and Local Government has already announced its intention to end planning restrictions on the domestic installation of wind turbines and solar panels. The Government are starting to make a great deal of progress. What is needed now is a way of overcoming the barriers to microgeneration, and securing the incentives that supply companies can provide for innovative action. It is vital for the Treasury to be part of all that.

I welcome the opportunity to debate stamp duty. Our report said that the next steps should involve more support for the 70 per cent. of households that are owner-occupiers and mostly not in fuel poverty. We recommended that the Treasury should consider reducing both stamp duty and council tax in the case of houses built to higher environmental standards, and asked for consultation on the issue, to be completed by September 2007 as part of the spending review.

I acknowledge that the Government have made a huge amount of progress, but we must accelerate it. It is vital to have a time frame consistent with consultation, but we also want to see real progress on the Select Committee’s recommendations.

Mr. Elliot Morley (Scunthorpe) (Lab)
It is a pleasure to follow my hon. Friend the Member for Stoke-on-Trent, North (Joan Walley). I agree with much of what she said. I also welcome the new clause tabled by my hon. Friend the Member for Nottingham, South (Alan Simpson). The issues are important—there is a real debate to be had about how fiscal measures can encourage the developments that society needs, such as increased energy efficiency and the combating of climate change.

The Treasury and, indeed, the Chancellor have an excellent record. The Chancellor has not been afraid of innovation through fiscal measures. The climate change levy, for instance, has been extremely successful. Climate change agreements have reduced emissions from major users. The pioneering of carbon trading in the United Kingdom has greatly influenced the European Union’s scheme, and is a great success. Even measures that do not receive the attention that I think they deserve, such as the reforms of company car taxation, are having a huge impact on emissions and the buying habits of the companies that are major purchasers of cars in our country. That decision alone was a bold one. The fact that the Treasury took that decision demonstrates that it has not shied away from the bold and radical use of fiscal measures to encourage environmental improvements. I greatly welcome that and the thrust behind the new clauses will continue it.

Of course there is a role for reporting and some very good points have been raised. DEFRA has already made a commitment to providing an annual report on measures to reduce emissions and on the sort of steps that need to be taken. My hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz) brought forward measures in his successful Bill, which he introduced with great skill. I am pleased that the Government supported and endorsed his Bill, which included reporting measures both to the DTI and to DEFRA.

There has always been a great deal of argument about the Government having a co-ordinated approach to sustainable and environmental measures. It is absolutely right that the Government adopt such an approach, so we need to think carefully about how best to carry out the reporting. We do not want individual reports from individual Departments—we need some co-ordination in a cross-government approach. Those issues can be discussed in respect of the shape of the reports and the commitments that have been given. That perhaps still requires some extra thought.

There is no doubt about the great role for microgeneration or the great role of small-scale decentralised power. As my hon. Friend the Member for Stoke-on-Trent, North mentioned, there are also barriers. The buying price of electricity needs to be resolved, as it is unsatisfactory at present. I welcome the steps taken to remove some of the planning barriers to microgeneration. Other important issues are the cost of new technology and the Government’s role in moving new technology from the development stage into the marketing stage. The inertia that acts as a barrier to new approaches, new ideas and innovation is another problem.

Fiscal measures are crucial and I greatly welcome measures announced in the Budget, such as the additional £50 million to help promote microgeneration. Together with the existing budget, it amounts to about £70 million. Energy efficiency commitments are also important and the Government have been successful in developing them.

I saw for myself how British Gas, as part of its contribution to its energy commitments, gave discounts on council tax for people who took up the option of having cavity wall insulation. It was hugely successful. The discounts were quite modest, but it proved attractive to consumers to secure the discount by taking up the subsidised cavity wall insulation that was part of the energy efficiency commitment. I very much hope that the EEC3 format provides an opportunity to develop some radical innovative ideas about using microgeneration and encouraging new measures for energy efficiency.

Similar measures can be applied to stamp duty. Personally, I think that some form of discount on stamp duty is a good idea. I accept that it is a complicated argument: does it apply to new homes; can it be applied to retro-fit those who modernise their homes through energy efficiency measures; can it be linked to a new code of sustainable building; can it be applied to zero emission homes? There is a lot of debate on those matters and a great deal of working out still to be done about the shape that will emerge. For those reasons, I hope that my hon. Friend the Member for Nottingham, South will not press the new clause to the vote.

There remains a lot of work to be done on the final shape, although I support the principle of the new clause. I know very well that within the Government there has to be discussion and issues of timing and costs have to be dealt with and resolved. I would not expect Treasury Ministers to accept the new clauses tonight, but we have seen what the Chancellor and the Treasury team can do in using fiscal measures to reach outcomes on climate change and sustainability. They have demonstrated that they are prepared to use such measures and apply them—and we know that they work and that they are successful. I recognise that the Government cannot accept these amendments as they stand, but I urge my hon. Friends on the Front Bench to give serious consideration to the very sound principles that they advocate. They make economic and financial sense, and they certainly make environmental sense in the light of the Government’s ambitious objectives, targets and commitments. Every section of government has to make a contribution if we are to be successful.

There is no doubt that fiscal measures and economic drivers are key to an overall integrated strategy. I hope that Ministers will give them serious consideration.

John Healey
This has been an interesting debate. It seems that the on-off relationship between the Tories and the Liberals in respect of environmental policies—that elusive cross-party consensus—may be on again.

I think that the areas of agreement between the Government and my hon. Friend the Member for Nottingham, South (Alan Simpson) are much greater than the areas of disagreement. We agree about the importance of energy efficiency and water conservation, and about the potential of microgeneration. We agree too with the assessment that the UK market for the available technologies is in its infancy, and that fiscal and other economic measures may have a role to play, along with regulation, public spending and, in some cases, information campaigns.

The differences between the Government and my hon. Friend the Member for Nottingham, South result from the specific details of new clause 9. I hope that my hon. Friend will take account of what my hon. Friend the Member for Scunthorpe (Mr. Morley) said in that regard. Much of this ground was covered in the debates on the private Member’s Bill successfully introduced by my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz). My hon. Friend the Member for Stoke-on-Trent, North (Joan Walley) made a number of telling points, and she is one of the most assiduous and consistent campaigners on the environment in the House.

My hon. Friend the Member for Scunthorpe also made some telling points when he talked about the progress that has been made on the environment since 1999, and the important measures that the Government have introduced in that time. He played a pivotal part in that process, during his time as a Minister with responsibility for the environment. He rightly said that my right hon. Friend the Chancellor has an excellent record on the environment, and that he has used fiscal and other economic instruments to good effect.

My hon. Friend the Member for Scunthorpe was also right in what he said about the climate change levy. The Opposition opposed it when it was introduced, and still do so now. The measure contributes almost one fifth of our emissions savings, as we pursue our climate change objectives. I must advise the Opposition that it is fine to will the ends but, in the end, they must back the means and the measures that will deliver those ends.

We also recognise the importance of household energy efficiency, as my hon. Friend the Member for Nottingham, South and other hon. Friends urged. It is central to reducing further—

Mr. Peter Ainsworth (East Surrey) (Con)
Will the Minister give way?

John Healey
No, I will not. The hon. Gentleman came into the Chamber only two minutes ago. He was not here for the debate—[Interruption.]

Madam Deputy Speaker (Sylvia Heal)
Order. Whether someone decides to give way or not is entirely up to the hon. Member on his feet.

John Healey
Thank you, Madam Deputy Speaker.

Household efficiency measures are of central importance if we want to reduce greenhouse gas emissions and if we want to provide greater security for the future. Improvements in energy efficiency are also essential if we are to reduce some of the unacceptable levels of fuel poverty in this country. That is why we have introduced all the measures to that end since 1997, many of which the hon. Member for Falmouth and Camborne (Julia Goldsworthy) outlined. She saved me a job by doing that, but she missed the support that the Government have given to the Energy Saving Trust, and the reduced rate of VAT on all the significant microgeneration technologies.

I come now specifically to new clause 9. I remind my hon. Friend the Member for Nottingham, South, and all those who signed the new clause, that my right hon. Friend the Chancellor publishes two documents, the pre-Budget report and the Budget, that set out our analysis of the situation and our plans for appropriate fiscal measures in this area. If my hon. Friend looks at the Budget, he will see that chapter 7, which runs to 24 pages, covers issues relating to water conservation, measures to protect natural resources and, in a substantial section, climate change and energy efficiency.

Chapter 7 also sets out a range of new measures introduced at the Budget. It outlines the extra £20 million that we promised to help local authorities to promote energy efficiency, £50 million to try to give a boost to microgeneration markets and the installation of up to 25,000 microgeneration units in schools, community buildings and homes. It sets out a new agreement we have reached with energy suppliers to provide an extra 250,000 subsidised insulation installations by 2008. Those measures will help with our carbon savings and will help to reduce annual fuel bills for those in most poverty.

22:45:00

New clause 10 and new schedule 2 set out proposals on stamp duty. We have been pressed for some time on the matter, but are still not convinced by the case for the proposals—and my hon. Friend the Member for Nottingham, South has not convinced us in his arguments tonight. The new clause and the new schedule duck some of the core questions, such as the level of relief, the qualifying threshold and the nature and scale of the rebates. It is hard to cost the impact of the proposals on the public purse and the contribution they might make to our climate change objectives.

There is a series of principled problems with the proposed policy measure. First, it would make the design and collection of stamp duty much more complex and costly. Secondly, it would require someone—perhaps the conveyancer—to withhold money for a period. I am not sure whether my hon. Friend has discussed the proposal fully with conveyancers, because it will impose significant new burdens on small businesses at a time when we want to reduce them.

John Bercow
Will the hon. Gentleman give way?

John Healey
No, I will not; the hon. Gentleman has only just come into the debate.

Thirdly, I point out to my hon. Friends who may be tempted to consider the proposals that a large number of buyers are exempt from stamp duty. Last year, at the Budget, we doubled the starting threshold for stamp duty to £120,000. This year, we increased it to £125,000 and have thus taken 400,000 homes a year out of the stamp duty system. About 50 per cent. of homebuyers are exempt from stamp duty, either through the new threshold or due to the fact that they are buying homes in disadvantaged areas. I ask my hon. Friends how we could refund the tax to people who had not paid it in the first place?

Does not it strike my hon. Friends as unfair that the proposed support would not be available to most people in the country? Fifty per cent. is the nationwide figure for exemptions. In the constituency of my hon. Friend the Member for Nottingham, South the figure is 58 per cent. In the constituency of my hon. Friend the Member for Scunthorpe, the residential sales transactions of 79 per cent. of households are exempt from stamp duty each year; in the constituency of my hon. Friend the Member for Stoke-on-Trent, North the figure is 85 per cent.

The proposed scheme would subsidise certain areas of the country much more than others. It would also subsidise people who are able to pay while doing nothing to help those in fuel poverty or on low incomes.

John Bercow
Will the hon. Gentleman give way?

John Healey
I will not give way at this stage.

Members have urged us to do even more on the environment, and both in the Treasury and as a Government we shall do so, but the measures proposed in the new clause are not the steps we should take. If the new clause is pressed to a vote, I ask my hon. Friends to resist.

Alan Simpson
The Financial Secretary has made an excellent speech, but one in support of new clauses 9 and 10 and new schedule 1. He is absolutely right to tell hon. Members on both sides of the House that there is no point in willing the ends if we do not will the means, and the means that we invite the House to sign up to tonight is to begin with the reporting process. I have yet to be convinced of the arguments against reporting that have been used either in the Chamber tonight or elsewhere, so I wish to press the new clause to a vote.

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

Division 276
04/07/2006 22:49:00
The House divided:
Ayes: 214
Noes: 279
Question accordingly negatived.

Further consideration adjourned.—[Mr. Heppell.]

To be further considered tomorrow.