The Committee consisted of the following Members:

Chairs: Mr David Amess  , †Mr David Crausby 

Ashworth, Jonathan (Leicester South) (Lab) 

Baker, Steve (Wycombe) (Con) 

Cryer, John (Leyton and Wanstead) (Lab) 

Doughty, Stephen (Cardiff South and Penarth) (Lab/Co-op) 

Duddridge, James (Rochford and Southend East) (Con) 

Evans, Chris (Islwyn) (Lab/Co-op) 

Gauke, Mr David (Exchequer Secretary to the Treasury)  

Gilmore, Sheila (Edinburgh East) (Lab) 

Gummer, Ben (Ipswich) (Con) 

Hands, Greg (Chelsea and Fulham) (Con) 

Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op) 

Javid, Sajid (Economic Secretary to the Treasury)  

Jones, Mr Marcus (Nuneaton) (Con) 

Kwarteng, Kwasi (Spelthorne) (Con) 

Leslie, Chris (Nottingham East) (Lab/Co-op) 

McKinnell, Catherine (Newcastle upon Tyne North) (Lab) 

McDonald, Andy (Middlesbrough) (Lab) 

Mearns, Ian (Gateshead) (Lab) 

Menzies, Mark (Fylde) (Con) 

Mills, Nigel (Amber Valley) (Con) 

Mowat, David (Warrington South) (Con) 

Murray, Sheryll (South East Cornwall) (Con) 

Nash, Pamela (Airdrie and Shotts) (Lab) 

Newmark, Mr Brooks (Braintree) (Con) 

O'Donnell, Fiona (East Lothian) (Lab) 

Offord, Dr Matthew (Hendon) (Con) 

Pearce, Teresa (Erith and Thamesmead) (Lab) 

Pugh, John (Southport) (LD) 

Qureshi, Yasmin (Bolton South East) (Lab) 

Shannon, Jim (Strangford) (DUP) 

Stephenson, Andrew (Pendle) (Con) 

Stewart, Rory (Penrith and The Border) (Con) 

Thornton, Mike (Eastleigh) (LD) 

Uppal, Paul (Wolverhampton South West) (Con) 

Williams, Stephen (Bristol West) (LD) 

Simon Patrick, Committee Clerk

† attended the Committee

Column number: 301 

Public Bill Committee 

Tuesday 4 June 2013  


[Mr David Crausby in the Chair] 

Finance Bill

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules)

Clause 35 

Relief for television production and video games development 

2 pm 

Question ( this day ) again proposed, That the clause stand part of the Bill. 

The Chair:  I remind the Committee that with this we are considering: 

That schedule 15 be the Fifteenth schedule to the Bill. 

Government amendments 39 to 45. 

That schedule 16 be the Sixteenth schedule to the Bill. 

Government amendments 46 to 49. 

That schedule 17 be the Seventeenth schedule to the Bill. 

Steve Baker (Wycombe) (Con):  As I was saying before we went for lunch, there is a danger that we could return in future to the television production and video games development industries and discover that they are larger than they might otherwise have been because of the special privileges they have been granted. 

My hon. Friend the Exchequer Secretary will remember that long before I got to this place I worked in a specialist company developing XBRL solutions. A firm such as that, working on electronic financial reporting, with a worldwide reputation, might well wonder why it was suffering a tax disadvantage in order to promote TV production or, more relevantly, video games development. 

The clause is very timely because we are in the middle of a lobbying crisis. It is just this kind of special privilege that leads to lobbying, because not only has a privilege been obtained, it is bound to inspire other groups to lobby to obtain similar privileges. It has also created some special interest groups that will lobby in order to retain privileges. 

My hon. Friend mentioned the definition of video games. Under paragraph 1 of schedule 15, proposed new subsection 1216AA includes a definition of television programmes. It is thought necessary to say that a television programme 

“means any programme (with or without sounds) which…is produced to be seen on television, and…consists of moving or still images or of legible text or of a combination of those things,” 

and that television includes the internet. 

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However, moving forward to paragraph 1 of schedule 16, proposed new subsection 1217AA does not tell us what a video game is. It says that a video game 

“does not include…anything produced for advertising or promotional purposes, or…anything produced for the purposes of gambling.” 

When I look at that lack of definition on the one hand and the excruciatingly detailed definition on the other, I am inclined to think that it can have been constructed only to meet state aid rules. That leads me to wonder what we are doing. 

The hon. Member for Kilmarnock and Loudoun talked earlier about reasonableness. In the 48 pages of these schedules there is a vast amount of detail, a lot of which we have not scrutinised. For example, the excluded programmes under schedule 15 paragraph 1, proposed new subsection 1216AD, are advertisements, current affairs, entertainment shows, competitions, live performances and training programmes. 

People in the production industry might well ask why they are to suffer a disadvantage under tax compared with people producing drama and comedy. I have observed that a number of advertisements have been strung together into a number of comedy programmes over time. Have the Government considered whether that might be done again? 

With regard to video games, proposed new subsection 1217AD on core expenditure says that 

“the following descriptions of expenditure are not to be regarded as core expenditure for the purposes of this Part…any expenditure incurred in debugging a completed video game or carrying out any maintenance in connection with such a video game.” 

As a software engineer, I would observe that software is never bug-free. It is also necessary to ask when it is completed. There is an enormous amount of subjectivity in the provision, which could lead to a great degree of fruitless discussion. 

The clause seeks honourably enough to support industries in which we have a comparative advantage, but I worry that we are creating special privileges that will have unintended consequences that will be paid for by industries that are doing less well. It will promote lobbying, not just by the affected firms but by others, for example those producing advertising, until everybody has a special tax privilege. 

Some would argue that it would make us terribly unpopular to say that these privileges should be taken away, but if we lowered tax rates for everybody and took away the special privileges, I think they would all be rather happier. 

Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op):  I am listening with great interest to the hon. Gentleman, who speaks with the benefit of considerable knowledge of the industry. Given the questions he is raising, does he intend to vote for the provisions to stand part of the Bill? 

Steve Baker:  I get the feeling that Opposition Members do not intend to press the matter to a Division, so I suppose we will have to see what they do. My hon. Friends on the Front Bench know that I never shy away from sticking to my principles on such matters, but I do not intend to force a Division. I am happy to tell the hon. Lady that I foresaw her question during lunch, so I am delighted that she asked. In conclusion— 

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Ian Mearns (Gateshead) (Lab):  Will the hon. Gentleman reflect on the fact that all the other sectors he has talked about that might like such a tax break would not automatically have competition in the international context, but would have such tax breaks locally? 

Steve Baker:  I am grateful to the hon. Gentleman for reminding me of a point that I wanted to discuss at some length, so as I conclude my opening remarks, I should say that when I hear the argument that international competition justifies some state-imposed benefit, it reminds me of all the old debates about protectionism and free trade. I co-founded the Cobden Centre to argue in various ways for free trade. 

We should not say, “Actually, everybody else will have to pay with a tax disadvantage to prop up a couple of industries that we favour.” People should compete freely with one another, wherever they are. I should like, at this point, to insert all the arguments in favour of free trade. 

With that, I apologise to the Minister for possibly making his life a little bit more complicated than he was anticipating. I look forward to the day when we have lowered taxes and ceased to grant such special privileges. 

Stephen Williams (Bristol West) (LD):  I want to make a few remarks, not so much about high-end television, although this morning the hon. Member for Cardiff South and Penarth mentioned Dr Who. The hon. Gentleman caught me on a visit to his constituency at the start of recess, dressed in casual gear. A visit to the Dr Who shop in his constituency was enjoyed and I recommend it to all Committee members. 

On the animation industry, the hon. Member for Wycombe said that the genesis of the changes was heavy lobbying. I am one of the people who did that heavy lobbying, as did our coalition colleague the hon. Member for Cities of London and Westminster (Mark Field), whom I mention as he is not a member of the Committee. Bristol and the Cities of London and Westminster are the two major concentrations of the animation industry in the United Kingdom. My constituency will be known primarily for Aardman Animations, the makers of “Wallace and Gromit”. As a free market liberal, I generally agree with the hon. Member for Wycombe that subsidies are not something that the Government should dole out. Government should not pick winners; doing so would replicate the mistakes of the 1970s. 

Aardman Animations and all the other animation businesses in the UK are incredibly successful in their own right. Their owners, who are usually the people who made the creative content in the first place, are incredibly innovative. The staff they work with in the UK are highly skilled and trained by our universities. We have the competitive advantage in brain power, but we are losing out on the fiscal international aspect. None of the businesses wants this subsidy from the Treasury. They would rather succeed in their own way, making their own profits from their own intellectual capital. The sad fact is that other countries are awarding subsidies to attract our brain power—our British innovation—to relocate abroad. 

There is a cultural aspect, as well as an international tax competition aspect. Many children’s programmes are now being made by overseas cartoon producers,

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even though they originally had British characters, and this trend will continue if the provisions are not included. I am not a parent—some Committee members are—so I cannot name any of the current cartoons that young people watch. I am of the age of “The Wombles”, “The Clangers”, “Paddington Bear”, and so on. If Committee members imagine “The Wombles” being narrated by a Dutchman or Ivor the Engine speaking with a Canadian accent, that is the cultural danger that we might end up with if the provisions are not included. There are good, British cultural reasons why the tax incentive needs to be introduced. It will ensure that we keep animators and producers of high-quality children’s programming on-shore in the United Kingdom, and that it is a worldwide success. I commend the clause to the Committee. 

Cathy Jamieson:  It is a pleasure to be back in the Committee this afternoon, and to follow the interesting contributions of Government Members. Perhaps the most interesting snippet we learned during the course of the morning is that the Minister seems destined for a future career either on the Select Committee on Scottish Affairs or as the new Doctor Who. He found himself unable to choose which would be the most exciting. I leave that for him to ponder, although I am one of those who thinks that it is time for a woman to be the next Doctor Who. Perhaps we will have some more of that campaign. [ Interruption. ]  

The Chair:  Order. 

Cathy Jamieson:  I gather I said something extremely controversial. I apologise, Mr Crausby, but we ought to get back to the important and serious business of clause 35, schedules 15 to 17 and Government amendments 39 to 49. 

As the Minister said, schedule 15 introduces new tax reliefs for animation and high-end television production, schedule 16 introduces a new relief for video games development, and schedule 17 provides the necessary consequential amendments to existing legislation. All the measures set out separate but targeted corporation tax reliefs for the animation, high-end TV and video games industries to be introduced from April 2013. Both the additional deduction and the payable credit proposed in the measures are calculated on the basis of UK core expenditure up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. For all three new reliefs, the credit is based on the company’s qualifying expenditure on the production of a qualifying animation, high-end TV programme or video game, of which at least 25% must be on goods or services used or consumed in the UK. We have heard about potential difficulties with some of those definitions. It has been helpful that we have seen the draft regulations. I raised some questions with the Minister earlier about them, and I am sure that there will further finessing and refinement. 

Government amendments 39 to 44 and 46 to 49 substitute the commencement date for the relief with a specified day to allow for the delay in commencement due to the European Commission investigation into video games. Government amendment 45 allows for a

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future order to be made by the Treasury amending the schedules to include any conditions imposed on the relief as a result of that investigation. 

Hon. Members will be aware that Labour has been supportive of the UK’s creative industries. We recognise the wider cultural and economic benefits that a thriving creative industry can bring to our country and economy. I am glad that the Government recognise the role that Labour in government played in supporting the creative industries. The impact note states that all three reliefs are based on Labour’s successful film tax relief, noting that 

“Since its introduction in January 2007, the FTR has supported £5.5 billion of investment into 825 British films which have received approximately £800 million in relief.” 

We pledged in our 2010 manifesto to introduce a video games tax credit, as well. I am glad to see that, notwithstanding the difficulties that we have talked about and that were raised during the Scottish Affairs Committee inquiry into the issue, the Government are now being supportive and giving some equivalence to the reliefs that are available in other parts of the creative industries. That is important. A strong argument has certainly been made by various hon. Members, so we welcome the proposed measures. 

2.15 pm 

We can all talk about our own favourite animation programmes. I was filled with horror when the hon. Member for Bristol West described what might have happened if “The Wombles” had been narrated in a different way. My son has reached the age where he is no longer watching such programmes as “Thomas the Tank Engine”, which seemed to be his all-time favourite, whereas for many of my nieces and nephews it was “Bob the Builder”. It is important to recognise that we have produced some extremely—[ Interruption. ] I think I hear the Soup Dragon being mentioned from a sedentary position behind me. I did not want to admit that I remember that programme. On that point, it is a good time to give way. 

Steve Baker:  I wonder whether the hon. Lady will move the relevant amendments to the schedules on Report in order to list her preferred targets for subsidy. 

Cathy Jamieson:  I should perhaps have anticipated that question following my earlier point about whether the hon. Gentleman was going to vote with the Government on this issue. 

To go back to more serious points, the reliefs are important, because times are tough for the creative industries in exactly the same way as for other industries. Numerous international subsidies have made it difficult for high-end TV and animation companies to compete in the international market, and in recent years there have been concerns about production being moved abroad as a result. I hope that the introduction of the targeted relief will help to reverse that trend and ensure the continued global success of UK high-end TV and animation for many years to come. The impact of the film tax relief shows us the potential of such measures to attract productions and to boost jobs and growth not only in

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the creative industries but, through the knock-on effect, in the wider economy. I will not go into all the statistics, but figures from the British Film Institute show that in 2008 some 23,000 people were working in film and video production, and by 2011 that number had increased to 39,000. That shows the potential of the proposed measures. Many people who work in the industry have not only campaigned for but made very positive comments about the proposals. 

Although it is good news that the high-end TV and animation reliefs have received EC state aid approval, so that they can get to work on building those industries, supporting the jobs and getting the boost that we need from them, there are still issues around the video games tax relief, which the Minister mentioned. When I was a member of the Scottish Affairs Committee, we looked at that industry and we visited Dundee, where my hon. Friend the Member for Dundee East (Stewart Hosie) was involved in trying to ensure that we completely understood the breadth, scale and potential of the video games industry. One of my most striking recollections is of the technical expertise required—describing them as video games is something of a misnomer, and people lack understanding of what is involved. Some of the work that we were shown had had a knock-on effect in areas such as software development and other technology, as well as the wider creative industries. That is very important, so it is good that the Government are introducing this boost for the games industry. The estimate that about 300 video games companies will be eligible shows why it is important to continue that effort. 

The Minister talked about the European Commission investigation, but can he outline the state of play with that? Has he recently made any representations to ensure that the investigation is brought to a conclusion? Does he have any idea of the time scale in which that may be done? Do he and the Government plan to do anything else to make the case for the relief? What assessment has he made of the number of jobs that the relief for the video games industry could bring to the UK? We have already heard about the importance of job creation possibilities in the film and television industry. Returning to the points made earlier about definitions, there has been some movement on the draft legislation and the guidance after discussions with industry representatives. Although everything has to be ratified through the European Commission process, is the industry now satisfied that the regulations are shaped in a way that will give it the clarity it requires to take advantage of the relief? 

In the impact assessments for each of the reliefs, the Government state: 

“Additional resource will have to come out of existing departmental budgets, which may impact on resource allocation elsewhere” 

in order for DCMS to administer the necessary cultural test for those reliefs. Can the Minister tell us a little more about that? Where might resources have to be readjusted or recast within DCMS to provide for that work? 

John Pugh (Southport) (LD):  I have a few observations to make. I am not a great fan of video games, because I think life is too short to engage with them seriously, but I do have constituents who develop them. My feeling is that we were a world leader in this area, because we had a generation of school children who used BBC Micro

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and Acorn computers before they got into simply working Microsoft applications. In the future, we may no longer be a world leader precisely because IT education has not been spot on over the past few years. We are talking about giving a fiscal incentive—I am very much in favour of what the Government are proposing—but I recollect that we had a fiscal incentive at the start of the coalition period and got rid of it quite quickly, apparently because it opened up the possibility of tax avoidance. 

A philosophical objection has been expressed to interfering in the free market. When the hon. Member for Wycombe was speaking about a purist and non-pragmatic view of the free market, I was reminded of the earlier observations about the British motor car industry. I do not want to sing the praises of the Austin Allegro, and clearly any attempt by the British Government to interfere in that industry has been wholly unsuccessful, but if we think that the Japanese did not interfere in their market to great success, we are seriously misleading ourselves. There is scope for Government to encourage the right sort of things through an effective industrial policy. 

The philosophical arguments were not the main ones used for rowing back from the progress initially made by the previous Government. Rather, the view was that the incentives would not work or were not needed. The industry protested at the time, suggesting that they were needed and that people would evacuate to Canada unless they were there. I do not know quite what has happened, but there were fears for the industry and expectations of the Government. One thing that we do not do well in Committee or in Parliament in general is recall previous Sessions and the fears expressed about tax legislation and fiscal measures, as well as the hopes that were realised. If there was a drift towards Canada, as seems to have been clocked, a false policy step was taken early on, and a good step is being made now. I cannot help but think that some of the ways we have handled the industry are a consequence of the adversarial tradition of Parliament, where every incoming Government have to change existing policies; in contrast, what industries want is certainty and continuity—something that will be obvious when we vote on renewables later this afternoon. 

The Minister might be able to reassure me, but what we need to do with tax reliefs is not only announce them and explain their effects, but undertake research on them to find out what will come to pass many years down the line, after we have all said our piece. 

Ben Gummer (Ipswich) (Con):  I do not doubt the wisdom of the Government’s intentions in the clause, but I have an observation to add to those of my hon. Friend the Member for Wycombe. I accept that high-tech industries are slightly different from those that we are discussing, but there are examples throughout the world of their being developed quickly as a result not of targeted tax subsidies, but of a general low-tax approach and because Government interventions were directed at encouraging venture investment and were not a matter of picking up one particular sector or another. I understand why the Government want to promote the television and games industry, but I hope that that is a sign of their intent to bring all corporate taxation down to the level that they propose in the clause, and a sign of their bravery in seeking lower taxation rates for the years to come. 

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The Exchequer Secretary to the Treasury (Mr David Gauke):  I shall respond briefly to this interesting and at times entertaining debate. I was disappointed that my hon. Friend the Member for Southport did not confirm or deny the rumour that two of his uncles were members of the Trumpton fire brigade. 

I turn first to the philosophical points made by my hon. Friend the Member for Wycombe, who asked whether the policy was too interventionist and a step away from the approach of allowing resources to be allocated on the basis of the market and so on. He made the case for lower taxes across the board, as did my hon. Friend the Member for Ipswich. It would be fair to say that in what the Government have done in tax reform, the major thrust has been towards lowering rates across the board—for example, a dramatic reduction in corporation tax rates from 28% to 20% by 2015. However, we must acknowledge the existence of specific areas where competition is particularly great and where there is much mobility, as well as other tax regimes that offer competitive rates. Were we to do nothing, we may well see a number of successful UK businesses leave—the hon. Member for Bristol West referred to Aardman Animations, which might have found it impossible to continue to operate in the UK given the other options that were available. 

We are ensuring that creative industries continue to make a valuable economic and cultural contribution to the UK, and that the reliefs for animation, high-end television and video games set out under the Bill are targeted and represent good value for money. The film tax relief shows the positive economic effects that such targeted support can have by incentivising greater investment in the industry, which in turn creates jobs and produces revenue for the Exchequer. In 2011-12, the film tax relief supported almost £1.5 billion of investment into more than 300 British films. Since its introduction in 2007, direct employment in the film sector has risen by almost 70%. 

2.30 pm 

Steve Baker:  Notwithstanding my hon. Friend’s remarks—I of course understand the pragmatic point about the world that we live in—I wanted to observe that the dominant ideology around the world during this country’s greatest period of industrialisation was once known as liberalism. It was at that time that the Liberal party actually defended liberalism like it meant it. 

Mr Gauke:  My hon. Friend draws me into dangerous waters; I will refrain from going there. Like him, I share a strong belief in the benefits of free trade, which is an approach shared throughout most of our politics in this country. 

Fiona O'Donnell (East Lothian) (Lab):  Does the Minister agree that the hon. Member for Wycombe is perhaps just a bit of a grumpy old Hector, and that his is just an ideological aversion to any kind of intervention by the state? 

Mr Gauke:  I think that my hon. Friend is perfectly entitled to ask such questions, and he raises a perfectly reasonable point. By and large, it is best to take a broad-based approach towards our tax system, but

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there are particular areas that I would argue require a degree of flexibility because of the mobility and therefore because of the competition. We are looking at one of those areas. 

I would like to deal with some of the other questions that have been raised. My hon. Friend the Member for Wycombe asked about the definitions contained in the schedules. The definitions of television and video games are determined by the Office of Parliamentary Counsel; they are not driven so much by state aid, but rather developed to target types of production at risk of moving overseas, about which we have received evidence. Any subjectivity will be clarified in guidance published in September. 

With regard to the questions raised by the hon. Member for Kilmarnock and Loudoun about the industry’s response to the legislation and regulations, the industry has been consulted throughout the process and is happy with the current form. Her Majesty’s Revenue and Customs is currently developing guidance with the industry to ensure that it is fit for purpose and easy to understand. My understanding is that the arrangement has been fruitful and constructive. 

I was asked about the delay in the commencement of the video games tax relief and the date that it will start. The Government notified the European Commission about video games tax relief in January. The Commission has now decided to open a formal investigation into the new relief. The process for and duration of the Commission’s investigation are determined by the Commission itself. Nevertheless, the Government are working closely with the industry to provide the Commission with the evidence that it needs to conclude its investigation as quickly as possible. Last week, the Government sent a response to the Commission investigation opening letter. Third parties now have until the end of June to submit representations. Details on how to do so are available on the Commission website. 

We expect video games tax relief to have a positive impact on job creation and estimate that around 300 companies will benefit from the relief. I point again to the film tax relief to demonstrate the significant potential of such reliefs to create jobs. 

Regarding resources in the Department for Culture, Media and Sport and funding for the cultural test administration, we fully intend the administration of the reliefs to be as straightforward and easy as possible for business to operate. The same process as that for the film tax relief, which is well used and liked by users, will be available. Discussions with DCMS with regard to spending are not something that we can necessarily get into great detail here, particularly in the run-up to the spending review, but as I said, the matter is relatively straightforward to administer. 

Cathy Jamieson:  Has the Minister looked in detail at part 4 of the draft regulations, which are about video games? They do not appear to me to be straightforward to administer. People have to accrue a number of points in order to go through the games process analogy and to be able to take advantage of the relief; it takes some degree of reading. What support will be available to the industry to ensure that people understand the policy? In

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trying to reduce a creative product to something that scores 15 out of 16 points, one may not be using the same mindset that is used in the creative industry. 

Mr Gauke:  I have complete confidence in DCMS to administer the policy. Regarding the rules that will apply to businesses seeking to use the reliefs, as I said, HMRC will publish guidance, which should make the process much easier. 

I think that I have covered all the points that I wanted to in response to the debate. I am grateful for the questions and for the probing that the reliefs have received. I believe that they will further strengthen the UK as a place in which to do business. It might be helpful if I end by quoting the president of HBO programming: 

“The new financial incentive,”— 

for high-end television— 

“coupled with UK’s existing reputation for excellence in television production, makes the UK among the most compelling production locations in the global marketplace.” 

We believe that that is a prize worth attaining and that the reliefs will play an important role. 

Question put and agreed to.  

Clause 35 accordingly ordered to stand part of the Bill.  

Schedule 15 agreed to.  

Schedule 16 

Tax relief for video games development 

Amendments made: 39, in schedule 16, page 296, line 17, at end insert— 

( ) may provide for those amendments to be treated as having come into force on a day earlier than the day on which the order is made or this Act is passed;’.

Amendment 40, in schedule 16, page 296, line 22, leave out ‘1 April 2013.’ and insert 

‘the day specified for the purposes of this paragraph in an order made by the Treasury (“the specified day”). 

‘( ) An order under sub-paragraph (1) may specify a day earlier than the day on which the order is made or this Act is passed.’.

Amendment 41, in schedule 16, page 296, line 24, leave out ‘1 April 2013’ and insert ‘the specified day’. 

Amendment 42, in schedule 16, page 296, line 24, leave out ‘date’ and insert ‘day’. 

Amendment 43, in schedule 16, page 296, line 27, leave out ‘1 April 2013’ and insert ‘the specified day’. 

Amendment 44, in schedule 16, page 296, line 28, leave out ‘date’ and insert ‘day’. 

Amendment 45, in schedule 16, page 296, line 33, at end insert— 

4 (1) The Treasury may by order make such amendments of this Schedule as are necessary for the purpose of complying with any undertakings given to the European Commission, or any conditions imposed by the Commission, in connection with an application for State aid approval.

(2) In this paragraph “State aid approval” means approval that the provision made by Part 15B of CTA 2009, to the extent that it constitutes the granting of aid to which any of the provisions of Article 107 or 108 of the Treaty on the Functioning of the European Union applies, is, or would be, compatible with the internal market, within the meaning of Article 107 of that Treaty.

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(3) An order under this paragraph may—

(a) make incidental, supplemental, consequential, transitional or saving provision, including provision amending Schedule 17;

(b) contain provision having effect in relation to times before the order is made or this Act is passed.

(4) A statutory instrument that contains (whether alone or with other provisions) an order under this paragraph may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, the House of Commons.’.—(Mr Gauke.)

Schedule 16, as amended, agreed to.  

Schedule 17 

Television and video games tax relief: consequential 

Amendments made: 46, in schedule 17, page 307, line 2, at end insert— 

( ) may provide for any of those amendments to be treated as having come into force on a day earlier than the day on which the order is made or this Act is passed;’.

Amendment 47, in schedule 17, page 307, line 7, leave out ‘1 April 2013.’ and insert 

‘the relevant day. 

‘( ) “The relevant day” is—

(a) in the case of amendments relating to Part 15A of CTA 2009, 1 April 2013, and

(b) in the case of amendments relating to Part 15B of that Act, the day specified by order for the purposes of paragraph 3 of Schedule 16.’.

Amendment 48, in schedule 17, page 307, line 9, leave out ‘1 April 2013’ and insert ‘the relevant day’. 

Amendment 49, in schedule 17, page 307, line 9, leave out ‘date’ and insert ‘day’.—(Mr Gauke.)  

Schedule 17, as amended, agreed to.  

Clause 36 

Health service bodies: exemptions 

Question proposed, That the clause stand part of the Bill. 

Cathy Jamieson:  The clause is a short, technical one, which ensures that certain health service bodies created by the Health and Social Care Act 2012 will be exempt from corporation tax, as their predecessor bodies were. As I understand it, that would include the new clinical commissioning groups and the three bodies whose status the Act has changed from special health authorities to non-departmental public bodies: the Health and Social Care Information Centre, the NHS Commissioning Board and the National Institute for Health and Care Excellence. 

The Minister is well aware of the Opposition’s views on the 2012 Act. I am sure we do not need to repeat debates we had in other places about that Act, although we retain our concerns, particularly those about turning the NHS into a full-blown commercial market and about the danger of putting competition before patient care. The Government’s own estimates have now put the cost of implementing the reforms at some £300 million more than originally planned—the cost will be around

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£3.5 billion in total. There has been a wide range of criticism from various groups, including the chief executive of the NHS, the British Medical Association, the Royal College of Nursing, the Royal College of General Practitioners, the Patients Association and a long list of many others. It is clear that there are still many concerns about the reforms. 

I have no doubt that we could have debated the rights and wrongs of the Government’s reforms to the NHS all day, once again, had that been the proper thing to do, but, as I said, our views are well known. Despite strong opposition both inside Parliament and across the country, that Act is now part of our legislation. However, for the sake of transparency, will the Minister give us his assessment of the cost to the Exchequer of the measure in the clause? On a technical point, will he also confirm, for the record, that the NHS Commissioning Board referred to in the Bill is actually the newly renamed NHS England? I believe there have already been some exchanges on that issue. Is there any likelihood that there could be any confusion, and if so, should there be more formal clarification? 

Mr Gauke:  As we have heard, the clause makes changes to ensure that certain NHS bodies are exempt from corporation tax. I shall provide hon. Members with some brief background to the clause. 

The Health and Social Care Bill announced an extensive reorganisation of the structure of the NHS. Among other things, it created new bodies to take over responsibility for commissioning health care. As separate corporate bodies, they would be liable to pay corporation tax. The Health and Social Care Bill also changed the status of two existing special health authorities, making them non-departmental public bodies. Although those two bodies continue to provide the same services as previously, their change in status now makes them liable to corporation tax. The clause exempts all relevant bodies from corporation tax, ensuring that their treatment is consistent with that of all other health service bodies, as well as with the treatment of their predecessor bodies. 

The clause provides an exemption from corporation tax for clinical commissioning groups and for three NHS bodies: the NHS Commissioning Board, the Health and Social Care Information Centre and the National Institute for Health and Care Excellence. Those bodies were established either by the National Health Service Act 2006 or by the Health and Social Care Act 2012. The new bodies are not undertaking any activities that are likely to be chargeable; the exemptions, therefore, provide certainty that, despite being bodies corporate, they will not come within the charge to corporation tax for any period. 

2.45 pm 

To answer one of the questions raised by the hon. Lady, I can confirm that there is no cost as a consequence of this measure; as the tax information impact note makes clear, there is a nil impact on the Exchequer. As for her question on whether the NHS Commissioning Board is essentially NHS England, yes, that is correct, but we do not believe that that causes any particular difficulties with the wording of the clause; for legal purposes, there should be clarity there. 

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I hope that that provides sufficient clarification to the Committee and that the clause may stand part of the Bill. 

Question put and agreed to.  

Clause 36 accordingly ordered to stand part of the Bill.  

Clause 37 

Chief constables etc (England and Wales): exemption 

Question proposed, That the clause stand part of the Bill. 

Cathy Jamieson:  The clause ensures that chief constables and the Commissioner of Police of the Metropolis—the head of the Metropolitan police—created by the Police Reform and Social Responsibility Act 2011, will be exempt from corporation tax. This is a short and technical clause that ensures that those office holders will be exempt from payment of corporation tax, which is detailed in the explanatory notes where they are described as “the new bodies”. 

Hon. Members will be aware that the Police Reform and Social Responsibility Act 2011 made significant changes to the structure of policing in England and Wales, specifically by creating police and crime commissioners, the Mayor’s office for policing and crime, and the new bodies just mentioned. Those changes have necessitated the provisions that we are discussing today. 

I will not go through all of the reasons why the Opposition did not support that Bill and many of the changes—specifically, the proposals for police and crime commissioners—that the Government brought in, but we are still concerned that the Government appear to be more interested in cutting police officers than cutting crime and we continue to see tinkering and restructuring rather than people on the front line, fighting crime. 

We did not support the creation of police and crime commissioners under the Act and we certainly did not support the way in which matters were consequently taken forward. Many people across the country were concerned about the low turnout in the commissioner elections and the cost involved in that; many felt that that money would have been better spent on the front line. However, we are where we are and that Bill passed through the House. In that spirit, it is only right that those bodies receive the same corporation tax exemption as their predecessors, the police authorities. 

The explanatory notes state that the police authorities were exempted from corporation tax by virtue of section 984 of the Corporation Tax Act 2010, as they were defined as “local authorities” under section 1130 of that Act. For corporation tax purposes, each of the police and crime commissioners, and the Mayor’s office for policing and crime, could be covered by section 984, but they are not defined as local authorities under section 1130 of the Act and there is therefore a requirement to bring in this provision, specifically to exempt them. 

In terms of the assessment that the Minister has made of the total costs, I assume that he will say the same in this instance as he said in relation to the previous clause about exempting these new bodies—the new police and crime commissioners and the Mayor’s office for policing and crime from corporation tax.

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However, and perhaps more significantly, will he tell us what the plans are for the period ahead to keep the costs of all of those bodies and offices under review? Those groups should get equitable treatment, but there will be some concerns about how they progress in the future. I look forward to hearing what the Minister has to say on that. 

Mr Gauke:  I am grateful for the hon. Lady’s support for the clause, which makes changes to ensure that the offices of chief constables in England and Wales and the Commissioner of Police of the Metropolis are not liable to pay corporation tax. The Police Reform and Social Responsibility Act 2011 made substantial changes to the organisation of police forces. It created police and crime commissioners and the Mayor’s Office for Policing and Crime in London. It also had an impact on the existing position of chief constables and the Commissioner of Police of the Metropolis. It made each of them a corporation sole and thus liable to corporation tax on any chargeable activities that they undertake. 

The clause exempts chief constables and the Commissioner of Police of the Metropolis from corporation tax. To provide certainty of treatment, the exemption goes back to the respective dates when the bodies came into existence. These bodies are unlikely to undertake any chargeable activities, but not exempting them would create unnecessary administrative burdens for them and for HMRC. Because it is unlikely that they would undertake any chargeable activities, there is negligible cost to the Exchequer here. Were we not to do this. it would have an impact on the implementation of the new policing model, while yielding no tax. 

For the sake of clarification, I should make it clear that it is only the corporate bodies that are being made exempt from corporation tax. The Committee can be assured that the chief constables and the Commissioner of Police of the Metropolis will still be personally liable to income tax. I would not want anyone to get the contrary impression. The hon. Lady tempts me into a general discussion on the costs relating to police commissioners, which I will resist. The clause simply ensures that implementation of the new policing model does not give rise to unintended tax consequences. 

Question put and agreed to.  

Clause 37 accordingly ordered to stand part of the Bill.  

Clause 38 

Real estate investment trusts: UK REITs which invest in other UK REITs 

Question proposed, That the clause stand part of the Bill. 

The Chair:  With this it will be convenient to consider schedule 18 stand part. 

Chris Leslie (Nottingham East) (Lab/Co-op):  The clause relates to something that hon. Members will be excited to debate: REITs. I know that many of them get lots of letters about real estate investment trusts. 

Greg Hands (Chelsea and Fulham) (Con):  I do. 

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Chris Leslie:  I am not surprised that the hon. Member for Chelsea and Fulham receives correspondence about them because they are very important investment vehicles and have changed the investment scene relating to property and the taxation of those financial instruments. REITs are securities that sell like a share on stock exchanges and invest in real estate directly through property or mortgages. As of September 2012, there were 34 countries with REIT-like arrangements in place. They are tax-advantage vehicles to encourage investment in the property sector. The clause and schedule 18 will allow UK REIT income, which is derived from investing in other UK REITs, to be treated as income of its tax-exempt property rental business. 

On the face of it, this is a relatively sensible piece of housekeeping in relation to the cash flow and investment profiles of real estate investment trusts. If a REIT releases cash on the sale of a property but has yet to identify suitable subsequent property investment or is holding excess cash, it currently has few choices but to place the cash on short-term interest-bearing deposit, which obviously does not have a vastly impressive return, especially at the moment. Many argue that REITs could make better returns on such cash if they were allowed to invest short-term in other REITs. That would promote greater liquidity in the property market and attract additional investment income, particularly into the built environment. So far, so good. 

However, I want to raise a couple of points with the Minister while we are on this provision. The first is a rather standard question. What is the effect of the policy on Exchequer revenues? It will have an impact more broadly on tax treatments. I do not know whether HMRC has done any modelling on how the arrangement might affect yields. I would be grateful if the Minister could let us know. 

A more substantive question is what these real estate investment trust vehicles are investing in. I understand that by and large they are in commercial property arrangements. There are some circumstances in which residential property REITs exist. What impact do REIT arrangements have on the residential property market and its price? There is concern in some quarters about the Government looking at the demand side of the equation but not much at the supply side of the housing market. 

If there are trades and transactions taking place in the residential property sector, there could be an impact on price inflation. Has the Treasury analysed the general impact of REITs on property prices in the residential sector? Does the Minister believe there is any supply-side benefit from the REIT arrangements in place? Will he also clarify whether there is any overlap between Help to Buy arrangements and investment in real estate investment trusts? 

We have already debated whether Help to Buy would exclude those remortgaging to release equity for onward purchase of a second or third home. I am not particularly averse to that happening, but for the fact that tax subsidy raises lots of eyebrows. People would ask why the taxpayer should subsidise that sort of activity. 

Mr Brooks Newmark (Braintree) (Con):  The hon. Gentleman is making some interesting points. Does he not agree that historically the REIT market is an efficient

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way to raise capital for individuals who want to make investments in real estate? I think that it provides the liquidity that is sometimes lacking. 

I do not want to make his arguments for him, but I am going to now. There is a point about the transparency of the pools of REITs. As we have seen with other derivative instruments, the lack of transparency created the problems of 2008. I hope that he would want to make a point about the importance of ensuring that these pools of mortgages are transparent, showing the assets that they have beneath them. 

Chris Leslie:  I am very grateful to the hon. Gentleman for his refreshing and welcome non-party point. He is correct that some of the securitisation of the sub-prime housing market, particularly in the United States, was very much part of the cause of the crash that left us with financial difficulties in this country. It would be useful if the Minister were able to assure us that for REITs, which generally have been a welcome vehicle for certain types of investment, there are no longer unintended consequences of opacity in terms of what is happening, so that investors know what they are getting into when they buy into real estate investment trusts. 

I shall be grateful if the Minister confirms that Help to Buy does not in any way give direct or indirect advantage to those who are investing in property through a real estate investment trust. In other words, can he confirm that there is an exclusion in the Help to Buy provisions that does not impinge on investing in property through REITs? I assume that that must be the case, but it is important that the Minister clarifies that. 

3 pm 

Ian Mearns:  My hon. Friend will remember that when baskets of what are known as liar loans were sold on the international markets they were given triple A credit ratings by the credit rating agencies. One must query the judgment and the investigative powers of the credit rating agencies and the legitimacy of the opinions that they give. 

Chris Leslie:  That is something that we have to safeguard against. I do not think it is necessarily a facet of the REIT market, because it is something that previous Administrations also introduced and helped to support. But it is always worthwhile to guard against these things, and to make sure that people check the transparency of the arrangements. 

The other question that I want to ask the Minister is about social housing and support for affordable housing construction. My understanding is that the Government originally consulted on the idea of using REITs as a vehicle for supporting social housing investment. However, for various reasons, they decided not to take that forward, so there was not a REIT vehicle arrangement to help what many of us think ought to be the priority. Of all the elements of the residential market that we need to start boosting, the social housing dimensions need the most support. Will the Minister explain why REIT investment routes have been blocked for social housing investment? What is the rationale for that, and is it something that he will take the opportunity to review again on another occasion? Those are the points that I have for the Minister on the clause. 

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Mr Gauke:  Clause 38 and schedule 18 make improvements to the real estate investment trust—REIT—regime by allowing a UK REIT to treat income from another UK REIT as income of its tax exempt property rental business. That change will generate positive benefits for both the REIT industry and wider Government objectives, such as stimulating growth and tax simplification. It will help support the REIT business environment and help remove potential barriers to further future investment activity. 

Let me provide the Committee with some background. REITs are a tax-exempt vehicle introduced to encourage investment in the property sector. Subject to certain conditions, REITs are exempt from corporation tax on property income, but their shareholders are fully taxed on the distributions or dividends received from a REIT. 

Since their launch in 2007, 24 UK REITs have been created with a total market capitalisation of over £28 billion. Currently, if a REIT invests in another REIT then it is taxed on the distribution it receives in the same way as the end investor. However, it is only an intermediary between the lower-tier REIT and the end investor. That means that both the upper-tier REIT and the end investor suffer from tax on investment in the same underlying property. 

The existing double tax charge on REITs investing in REITs is economically inefficient, and reduces the profits that a property can offer. Therefore, following Budget 2012 the Government undertook a consultation to consider the tax treatment of REITs investing in REITs, and 15 written responses were received. There was consensus that amending the tax treatment of REITs investing in REITs would generate positive benefits for both the REIT industry and wider Government objectives. Deloitte commented: 

“It will allow REITs to run their businesses more flexibly and facilitate further investment into the UK property sector…The change may spawn a number of new substantial REITs”. 

The Government have, therefore, decided to legislate on the matter. Clause 38 and schedule 18 will relax the REIT rules by allowing REITs to treat income from other REITs in the same way as income from property. Such income will be exempt from corporation tax on the condition that the upper-tier REIT distributes all the income from the lower-tier REIT to its investors. The tax on the property income distribution collected at the shareholder’s level will, therefore, be protected. The measure will have effect for accounting periods beginning on and after Royal Assent. Amending the tax treatment of income from REITs investing in REITs will allow REITs to split their portfolios into separate asset classes, which will facilitate greater investment in the property markets. 

During the consultation, respondents proposed including REITs in the definition of “institutional investor”. We have listened to interested parties, and we announced at Budget 2013 that the Government would informally consult on the matter with the industry this year. HMRC is also informally consulting on one technical matter that may enhance the working of the schedule regarding the definition of tax-exempt income. 

Mr Newmark:  I am trying to understand the thrust of the clause. Is it a way of preventing double taxation by a REIT investing in a REIT, or is it a device to help

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facilitate capital flows in the property market to encourage people to invest in REITs? Is it one or the other, or is it really a bit of both? 

Mr Gauke:  My hon. Friend and I both served on the Bill Committee of the Finance Act 2006, in which REITs were introduced, and he and I spent many a happy hour debating them. The clause is designed to avoid double taxation to ensure that a REIT that invests in a REIT does not find that tax is being paid at two points. The provision should help the expansion of REITs and remove a barrier to growth. I hope that provides my hon. Friend with some clarification. 

I turn to the points raised by the hon. Member for Nottingham East. He asked about cost. As the tax information and impact note states, the provision will have a negligible impact on the Exchequer. It removes a barrier that has prevented REITs from investing in REITs, which has generally not happened because it has been an inefficient structure. As a result, the cost of the change to the Exchequer will be negligible. 

The hon. Gentleman asked about the relationship between REITs and the Help to Buy scheme. Those are two separate policies. Help to Buy aims to help families get on to the property ladder or to ascend it and REITs are essentially property investment vehicles, so they are in rather different places. Residential REITs are not yet a reality, but one is about to enter the market. There is nothing to prevent REITs from investing in residential property, but currently returns are not high enough to attract investors. 

Chris Leslie:  Simply on the Help to Buy point, if a residential REIT decided to purchase 100 residential units beneath the £600,000 threshold in the Help to Buy scheme, would it qualify for loan assistance from the Government?

Mr Gauke:  No, it would be separate, because the Help to Buy regime is designed for people who are looking to reside in the property that they purchased, whereas the REITs regime is for those who are making a property investment as opposed to wanting to reside in the property that is purchased. 

The hon. Gentleman asked about the creation of social housing REITs. He is right to say that we looked at that. Responses to the consultation suggest that the need for further changes to the REIT regime to support social housing REITs was seen as not particularly pressing. For some stakeholders, the changes to the REITs regime in the Finance Act 2012 were already sufficient to enable them to set up a social housing REIT. 

Other interested parties currently not considering establishing a social housing REIT were concerned that housing at social rents alone would be unable to generate sufficient returns to attract investors. For those parties, further additional changes to the REIT regime, such as the removal of the listing requirement, would be unlikely to make any difference to their thinking. Essentially, we did not believe that the various ideas that we looked at to encourage social housing REITs would be effective. 

The hon. Member for Nottingham East asked about the impact of REITs on house prices. We cannot yet assess the impact on house prices as there are not yet

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any substantial residential REITs on the market, so the answer is that they have not had an impact on house prices. 

I hope that my answers are helpful to the Committee. The provision is a useful way to tidy up the REIT regime. I agree with the remarks made by my hon. Friend the Member for Braintree and by the hon. Member for Nottingham East: REITs are a useful addition to the UK system and can facilitate property investment. We are considering a relatively minor measure that can assist in that objective. 

Question put and agreed to.  

Clause 38 accordingly ordered to stand part of the Bill.  

Schedule 18 agreed to.  

Clause 39 

Corporation tax relief for employee share acquisitions etc 

Question proposed, That the clause stand part of the Bill. 

Chris Leslie:  I am grateful for the opportunity to say a few words about the clause, which relates to the rules on the availability of corporation tax deductions where firms award shares or share options to their staff. Apparently, the clause is not designed substantially to change the rules; it merely clarifies. If an award does not fit within the specified circumstances, no relief would be available. I understand that there might have been some grey areas around the provisions, which is why the Government are seeking to clarify that no deduction would be available for other expenses relating to the provision of shares or for any connected matter beyond that set out in the Corporation Tax Act 2009, and that no deduction is possible for the grant of a share option unless the employee requires the shares under that particular option. 

It is not a particularly unexpected clause. It provides some clarification, although I have a couple of points that I want to raise with the Minister on the general provisions relating to tax relief for employee share acquisitions. First, can the Minister clarify the extent of the claims that HMRC may have queried or may feel were illegitimate, which were behind the need to introduce this clause? I assume there must have been various attempts to claim relief that were frowned upon or were not permitted under the provision. Have the Government estimated the cost to the taxpayer as a result of the avoidance arrangements or practices that were being examined?

3.15 pm 

I want to ask about the changing nature of employee share payments and share options, especially in the banking sector. The Minister will know that, for various reasons, inspired predominantly by the European Union, there has been a shift in the composition of remuneration arrangements for many in the banking sector; it is becoming less about salary or cash bonus payments and much more about rewards in the form of share payments and share options. Clearly such payments present a changing environment for taxation. 

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The Minister will have to forgive me for asking some naive questions about the practice. I assume that bankers who are remunerated in shares have to pay income tax at some level on the value of those payments, even if they are essentially payments in kind rather than in cash. Or is it the case that taxation is taken at the point at which the shares are disposed of? A big shift is taking place in the banking sector, particularly following some of the European Union decisions regarding payment of employees by share options or transactions. Has there been a change in the tax yield for the Exchequer as a result of that shift in behaviour? If banker A is given a £1 million payment, the calculation of the income tax deduction will be quite clear, but I am not sure—and it would be helpful for the Committee to know—if individuals are paid in shares, at what point they mature and at what point there are options on them. Inspiration will probably strike at any moment, but I would be grateful to the Minister if he elaborated on that. 

Mr Newmark:  Again, I am listening carefully to the political thrust of the hon. Gentleman’s question. Surely he knows as well as all of us—at least on the Government Benches—that the main beneficiaries of such options are employees in smaller businesses. The clause does not deal with bankers trying to circumvent the system. I am sure he will agree that the beneficiaries of most options are ordinary employees in small businesses with fewer than 10 people. 

Chris Leslie:  Indeed, I hope that that is the case. I support employee share ownership in small business arrangements; I agree with the hon. Gentleman totally on that matter. However, I do not agree with the rather curious, byzantine policy of asking employees to waive their employment rights in exchange for share options— something that we will debate later. 

I am not sure about the ceiling on share acquisitions by employees and whether the policy is open as a practice for remuneration at higher levels. To what extent can such provisions be used as the main way in which bankers are remunerated? The practice will become increasingly common, not just with shares, but with contingent convertible instruments and other financial instruments with ongoing liability for the individual who has been paid, but may have sums clawed back if the company’s performance turns down in the long term. 

Remuneration in that sector is becoming more complicated. That is my general point. I hope that it is not unreasonable to ask what the tax arrangements are, given that extra complexity. 

Mr Newmark:  I have just been reading the explanatory note. If I am wrong, the hon. Gentleman will correct me, but my understanding is that if they are receiving options of this kind, they are taxed as income rather than as capital gain. 

Chris Leslie:  Which is indeed the point I am trying to ascertain from the Minister. I want that clarified a little more in the public domain. 

Mr Gauke:  Clause 39 clarifies the legislation on the corporation tax deductions available where companies grant share options or award shares to their employees.

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It is one of several provisions in the Bill to ensure that corporations pay their fair share of tax and cannot exploit legislation to gain unintended tax advantages. The normal rule for employee share options and awards is that the availability of corporation tax relief for companies is linked to employees being charged to income tax on acquiring the shares. However, some companies have recently been claiming deductions for accounting expenses for share options and awards in cases that run clearly counter to this principle. 

We are introducing the clause to put the tax position beyond doubt. It confirms that, other than in specified circumstances, no deduction is available for share options where an employee does not acquire the shares in question. It also confirms that where statutory relief for a share option or award is available, no additional deduction should be made. In the Government’s view, that is already the case under current corporation tax legislation. That brings me directly to the first question asked by the hon. Member for Nottingham East, which concerned the cost if we did not go ahead with clause. 

Our view is that the measure confirms the law as it has been applied by HMRC since the current rules were introduced in 2003. It is entirely consistent with the principles set down by Parliament in 2003 that there should be symmetry between the availability of corporation tax relief for a company and the employee being chargeable to income tax on acquiring the shares in question. We are confident that our current application of the rules is correct. HMRC will continue to pursue any outstanding current cases under the normal procedures if need be before tribunals or the courts. This is a clarification of what the law currently is and we have not made any assessment as to revenue protected because we think that revenue was already protected under existing legislation, but it is always helpful to remove any uncertainty in these areas. 

The wider question raised by the hon. Gentleman was about the taxation of shares in these circumstances. Income tax is chargeable on shares provided by reason of employment in the same way as other employment income. Usually income tax is due when the shares are acquired by the employee but there are some exceptions. Where there are share options, income tax is due when the options are exercised. The purpose of the rules is to tax rewards delivered through shares in the same way as other remuneration. The new provision aims to remove any possible uncertainty and to make it quite clear to companies that these claims are not valid. It is consistent with the intentions of Parliament when the current legislation was passed in 2003 and with the way HMRC has applied the rules since they were first introduced. 

Question put and agreed to.  

Clause 39 accordingly ordered to stand part of the Bill.  

Clause 40 

Derivative contracts: property total return swaps etc 

Question proposed, That the clause stand part of the Bill. 

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Chris Leslie:  The clause—again, a very exciting one for hon. Members, I know—relates to derivative contracts and property total return swaps, which come up frequently in Chelsea and Fulham but no doubt more frequently in Gateshead and other parts of the country. I am sure my hon. Friend the Member for Gateshead is constantly dealing with such matters in his caseload. 

Ian Mearns:  I have had to employ extra staff. 

Chris Leslie:  As my hon. Friend says, he needs extra staff for that work load: I am sure the Independent Parliamentary Standards Authority will be supportive. 

In a total return swap, the party receiving the total return will receive an income generated by the asset, as well as the benefit if the price of the asset appreciates over the life of the swap; in return, the total return receiver must pay the owner of the asset the set rate over the life of the swap. The clause, I am told, responds to tax avoidance schemes involving property return swaps and is designed to stop firms exploiting the property total return swaps legislation to convert capital losses into trading losses. 

Companies are apparently abusing the current law by entering into swaps between different members of a group of companies in order to convert capital losses into income losses, even though the swap does not result in the group obtaining any net exposure to property. Clearly, therefore, the clause is important as it is needed to deal with that loophole. The clause rules out any capital return where the swaps are intra-group and limits any capital return to the actual return in the contract. 

Tackling such opportunistic tax avoidance schemes is clearly an important goal and one which the Opposition support, especially given the context of the wider size of the derivatives market. When trying to keep track of financial innovation, as it is sometimes known, legislators and policy makers have often struggled to keep pace. Given that the derivatives market is now something of the order of $1.2 trillion, we have to get these matters right. 

I have some questions for the Minister on the clause. First, there must surely be some enforcement complexities involved in watching and overseeing some of the derivative tax arrangements. How will HMRC—particularly given the pressures that it is under, with 10,000 staff lost and resources depleted across the organisation—police the arrangements in the clause? Who will be carrying out that enforcement activity—does responsibility for it fall to a particular unit in HMRC? 

Will the Minister set out the extent of the current abuse of the loophole—did a particular case prompt the clause? How much do the Government anticipate gaining by closing the door on the practice? Finally, given that the United Kingdom is host to around 75% of the EU’s derivatives market, how will the clause apply to foreign companies with subsidiary operations in the UK? We are talking about intra-group arrangements, and so some cross-border issues crop up with regard to corporate form and corporate governance: have the Minister and his officials addressed the international dimension to the clause? 

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Steve Baker:  Notwithstanding the hon. Gentleman’s opening remarks, one of the things that has excited me over the course of my short parliamentary career has been the international financial reporting standard and its effect on derivatives: the mark-to-market accounting rules within it incentivised banks to transact in derivatives, in particular because they can up-front unrealised cash flows to manufacture profit and capital. Without going too deeply into that, I would refer the Minister to a book called “The Law of Opposites” by my colleague Gordon Kerr, who has created that kind of product. Have the Government assessed whether IFRS accounting is incentivising the creation of these derivative contracts? If so, will they look at amending those rules, not just to address this problem but in the interests of the wider banking system? 

3.30 pm 

Mr Gauke:  Clause 40 makes changes to ensure that the legislation that applies to property total return swaps cannot be exploited for tax avoidance and that the tax outcome of the legislation matches genuine exposure to the property market. 

I will briefly set out some background to the clause. Property return swaps can be used to give investors exposure to the property market without actually investing in properties, or to allow property investors to hedge their exposure. The tax legislation covering swaps aims to match the treatment of actual investment in property, in particular by providing that returns from swaps may be taxable as capital gains where they are linked to a property index. 

Some avoidance schemes exploit this legislation with the use of contracts that do not give genuine exposure to movements in both directions in the property market, and that generate capital returns that exceed those that arise from movements in actual property values. 

The aim of these schemes is artificially to convert capital losses into trading losses, which can then be set against other profits in ways not intended by the legislation. We do not accept that these schemes achieve the results claimed, but this legislation will put the tax position beyond doubt. 

Changes made by clause 40 will prevent avoidance in three different ways. They will provide that capital gains treatment will not be available when swaps are entered into between companies in the same group. They will provide that any tax charges are linked to genuine movements in the property market, and not limited with the use of any artificial arrangements; and they will provide that capital gains treatment will not be available where tax avoidance is involved. 

The hon. Member for Nottingham East asked whether HMRC would be able to cope with dealing with derivatives such as those we are talking about. Schemes would be disclosed under routine enforcement, and the changes are relatively minor in relation to the 2009 legislation. Those matters will be monitored by inspectors looking at company accounts and by specialist teams. 

I am tempted to get into a debate with the hon. Gentleman about job reductions in HMRC, for which he quoted a number of 10,000. I do not know why he did not quote a number of 30,000, because that is what occurred under the previous Government. To be fair to the previous Government, there have been opportunities

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to reduce the number of people working in HMRC in particular areas, with the use of new technology and improved efficiency. It is not just about numbers. That is the approach that we have certainly taken, and HMRC’s yield is increasing significantly over the course of this Parliament. However, I digress. 

The hon. Gentleman also asked how overseas companies will be affected. Where foreign companies fall within the corporation tax regime, because they have a permanent establishment in the UK that is chargeable to corporation tax, normal corporation tax rules will apply. As for how many companies are likely to be involved and how much tax, HMRC is aware of three companies that have used the scheme four times in total. The estimated loss was in the region of £100 million per year. 

My hon. Friend the Member for Wycombe asked about the application of the IFRS. I can assure him that HMRC is working actively on its adoption to ensure that legislation keeps up to date. I do not intend to discuss the wider issue to which he referred, but I hope that he is reassured by my remarks. 

With those comments and, in summary, I want to make it clear to the Committee that the three changes will ensure that the tax treatment continues to provide a fair outcome for genuine users of swaps linked to the property market, but that the policy cannot be used for tax avoidance. I trust that the clause will stand part of the Bill. 

Question put and agreed to.  

Clause 40 accordingly ordered to stand part of the Bill.  

Clause 41 

Corporation tax: tax mismatch schemes 

Question proposed, That the clause stand part of the Bill. 

The Chair:  With this it will be convenient to discuss that schedule 19 be the Nineteenth schedule to the Bill. 

Chris Leslie:  The clause will block a scheme that used partnerships to avoid what is known as group mismatch legislation. It targets a loophole whereby companies reduce their tax liabilities through the use of loans and derivatives that create artificial losses. It worked by companies entering into loans with a partnership of which they were a member. The loan was then accounted for differently by the company and the partnership to give a tax advantage. I am sure that members of the Committee know that that is described as the asymmetric treatment of loans or derivatives. Partnerships or other collective schemes have been used repeatedly in tax avoidance schemes, and it is important that we support steps that address some of those practices. The clause targets schemes that aim to defeat the group mismatch legislation, such as allowing different members of a group of companies to bring separate amounts into account in respect of the same loan or derivative. 

HMRC is dealing with several ongoing court cases, and it would not be proper to refer to them for sub judice reasons. However, it is notable that some comments have been made by HMRC representatives about the schemes making what would otherwise be taxable income vanish into thin air. That was a good way in which to

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explain how such accounting treatment can create loopholes that are exploited, especially in the catering, hospitality and brewing industries. I should be grateful if the Minister can give us some rationale for why particular groups of companies in those sectors have taken to using such a provision as a way in which to minimise their tax exposure. 

Will the Minister also say a word about the complexity of the Government’s chosen solution, with more provisions being jimmied into the Corporation Tax Act 2010, much of which will duplicate some of the current mismatch rules? Would it not be simpler to deal with the problem by amending the current rules so that they catch a wider set of arrangements, instead of adding eight further clauses to the existing tax code? Will the measures be needed when the general anti-abuse rule is put in place for Royal Assent? How many tax mismatch schemes are currently being examined by HMRC? What estimate can the Minister give of the number of companies or transactions that will be captured under the new law? 

Finally, will the legislation cover mismatch schemes that cross borders? It is a point I have already asked about, but it is more relevant now in relation to some of the transfer pricing arrangements that have been in the media recently. Such arrangements could cut into some of these particular group mismatch arrangements. I would be grateful if the Minister could also say whether that will also form part of the broader OECD discussions about tax avoidance that we hope will take place. 

Mr Gauke:  Clause 41 and schedule 19 make changes to defeat tax avoidance schemes that rely on a mismatch being created by accounting in two different ways for a transaction entered into by a company. The changes are intended to defeat avoidance schemes that involve loans or financial derivatives entered into by companies. Such schemes involve a mismatch being created by a company entering into a loan or a derivative with a partnership of which it is a member, or other similar arrangements. The company and the partnership account for the loan or derivative differently so that a mismatch arises. For example, a loss might arise in the company with no matching profit in the partnership, giving rise to a tax saving overall where there has been no real economic loss. 

We do not accept that these schemes achieve the effect that is claimed, but clause 41 and schedule 19 will put the matter beyond doubt. The changes that they make will ensure that, where a tax advantage arises from any asymmetry in the way in which a company accounts for a loan or derivative, that advantage will be removed. The clause is broadly worded so that any asymmetry is caught, whatever the details of the particular structure used. 

The hon. Member for Nottingham East asked why the normal tax rules did not prevent this avoidance. If a company is taxed on financial instruments based on its own accounting profits or losses, different accounting policies may be adopted in respect of the same transaction, where a company enters into a financial transaction with a partnership of which it is a member so that the same transaction is reported by the company and the partnership in different ways. That may give rise to an asymmetrical tax outcome. Transactions involving two

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different companies will be caught by the group mismatch rules in the Corporation Tax Act 2010, and any tax advantage will be prevented. Clause 41 and schedule 19 will prevent any tax advantage from arising where a single company is involved. 

The hon. Gentleman asked whether the legislation was too complicated. It is worth pointing out that it is based on the group mismatch anti-avoidance legislation in the 2010 Act, so it will be familiar to both companies and their advisers. He also asked whether the general anti-abuse rule would prevent this kind of avoidance. Depending on the circumstances, the GAAR may well prevent it. However, this precisely targeted measure will give companies certainty and close down avoidance schemes that rely on such a structure. 

The hon. Gentleman asked how many companies liked to use or had used the scheme, and how much tax was involved. HMRC is aware of four companies using the scheme and the loss of tax is estimated at £30 million each year. There was a concern that the use of such schemes would spread quickly if we did not take action. The use of the scheme is not limited to one sector—indeed, even among that small sample, companies in a range of sectors appear to have used it. 

I hope that I have provided some further information to the Committee and some clarity on the matter. I welcome the hon. Gentleman’s support for the measure, which is designed to protect revenue and deal with avoidance. It is part of the Government’s determination to deal with tax avoidance at every opportunity. 

3.45 pm 

The hon. Gentleman raises a wider issue of the base erosion and profits shifting work that the OECD is undertaking, following the encouragement given to it by the Prime Minister and the Chancellor. We are actively involved in measures to ensure that the international corporate tax system is fit for purpose and adequate for the 21st century. There is, perhaps, a wider debate to be had on that, but, with regard to clause 41, I hope that I have provided sufficient clarity to the Committee so that it may stand part of the Bill. 

Question put and agreed to.  

Clause 41 accordingly ordered to stand part of the Bill.  

Schedule 19 agreed to.  

Clause 42 

Tier two capital 

Chris Leslie:  I beg to move amendment 11, in clause 42, page 20, line 8, at end add— 

‘(7) The Treasury shall publish details of changes to tax revenues as a result of amendments made by this section and of each other change in respect of the treatment of regulatory capital requirements and tier one capital.’.

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

Chris Leslie:  We now turn to issues that may be slightly more illuminating for the Committee: in a nutshell, the tax breaks that banks are able to receive. Although the way that is described may seem opaque, we are

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looking at a clause that relates to tax relief for the capital instruments that the banks are able to gain as part of the changes in the structure of their balance sheets, prompted by regulatory shifts. 

The amendment would simply ask the Treasury to publish details of changes to tax revenues as a result of the amendments made in clause 42, which is clearly something that it would want to support, and also to be transparent about the other changes that it is making in relation to the treatment of regulatory capital requirements in tier one capital. The amendment would force the Chancellor to publish the costs to the Exchequer of tax relief granted to the banks for their new regulatory capital requirements. 

The legislation will be treated as having come into force on 26 October last year. I am told that the tier one capital changes that were announced in the Budget will be enacted through a statutory instrument, which will mean that the coupon—the annual debt interest charge—will become tax deductible. That relates to the capital requirements directive, CRD IV, from the European Union. 

In terms of tier two capital arrangements, however, the changes announced in the Budget will be enacted in the Bill. For a start, it would be useful if the Minister would explain the different legislative routes being taken for deductibility in respect of tier one versus tier two capital, and why there has not been some comparability between those two forms of capital instrument. Some explanation on the differential timings that the Treasury took on those questions would be particularly helpful. 

The clause will mean that the treatment of tier two remains the same after tier two debt instruments have been re-categorised as bail-in-able; in other words, when they are no longer seen as normal commercial interest instruments. 

On capital arrangements, there is so much financial innovation and complexity that it is sometimes difficult for the layman or laywoman to penetrate the jargon and nomenclature of some of these banking instruments. It is therefore difficult for policymakers to get a grip on what is going on and what changes are happening, so that we can be clear about what tax advantage is being granted to the banking sector as a result of the Treasury’s moves. For a start, I urge the Minister to make his comments as accessible as possible so that we can all have a proper insight into the realities of what exactly is happening. I expect that we are talking about considerable sums of money and large amounts for the taxpayer. 

Some capital instruments are equity, and many Members will be familiar with their character, but some capital instruments fall into that grey netherworld where they are half debt, half equity or quasi debt, quasi equity. It is therefore understandable that the regulators and the Treasury are looking at the definitions and the tax treatment of each along the way. Perhaps it is the judgment that has been made about the extent to which there is any ongoing liability for the party that is making the loan to the banking institution. It would be useful if the Minister clarified the framework he is applying to the application of tier one and tier two capital instruments with banking capital. 

We know that the Government have struggled somewhat with tackling the questions of capital adequacy and leverage in the banking sector. For the banks to be

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sufficiently safe after the global financial crisis, we need to ensure that there is a good relationship between the capital adequacy rules and the leverage that banks are able to exercise. 

In a separate legislative environment, the Financial Services (Banking Reform) Bill continues to make progress through Parliament. I know that hon. Members are familiar with that Bill. We are discussing capital adequacy and leverage in those forums, but it is important when it comes to the taxation of some of these capital instruments that we are clear about the subsidy that the taxpayer is indirectly providing to the banking sector so that it can operate in a safe and sustainable way. The regulators require that a certain amount of capital is set aside. 

We have heard about the subsidies for particular sectors and picking winners, and the favourable tax treatment and the deductibilities for the banking sector are clearly of interest to our constituents. Some hon. Members shake their heads and say that it is not of interest to our constituents, but it is an important matter. 

James Duddridge (Rochford and Southend East) (Con):  I was shaking my head not because of the hon. Gentleman’s comment but because of his more general analysis. I thank him for allowing me to put it on the record that that was not my intention. 

Chris Leslie:  I stand corrected. It is my analysis that causes the hon. Member for Wycombe to shake his head. I am not particularly surprised about that. 

Steve Baker:  I am sure that the hon. Gentleman has followed my speeches for long enough—he has at least been the victim of them—to know that I think that banks should be stripped of all privilege and operate in a capitalist system like every other firm. 

Chris Leslie:  In many ways, that is the nub of the question. We need to understand what the subsidy is from the taxpayer to the banking sector. This subject is cloaked in massive complexity—there is talk of tier one versus tier two and capital instruments and all those other things; it is no wonder that people glaze over with the lexicon that we use with these arrangements. I know that the Minister will rise above obfuscation and take the opportunity to say clearly in black and white how much money the taxpayer is providing through the tax deductibility for those reserves and capital arrangements that we expect banks to have. That is the nub of the question. 

I am particularly keen that the Minister gives us some insight into how the Prudential Regulation Authority’s announcement on capital levels and capital adequacy might impact on clause 42’s operation, because either yesterday or the day before, the Bank of England and the PRA made a number of announcements and judgments about the capital adequacies of individual banks. We now have some figures and expectations about the capital adequacy of the main institutions. They will give us a clearer baseline against which we can judge the taxpayer subsidy for those particular banks. In other words, it might even be possible for the Minister to provide the Committee, in tabular form, with some sort of bank-by-bank breakdown of the tax reliefs and

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deductibilities for the capital instruments that we now know are expected of each institution. Does the Minister intend to publish that and get in line with our amendment regarding the transparency of the impact on tax revenues and taxation more generally of the deductibility of such capital instruments? 

A fair argument may be made to support certain deductibilities for certain types of instrument. Will the Minister set out where he draws the line? There are many forms of capital instrument. Tax deductibilities arise in other corporations in other circumstances, and I would not argue that there should necessarily be no tax reliefs for capital arrangements in those circumstances. However, a new generation of capital instrument is being created in the market, for which a generous set of tax assumptions is being provided. It would help if the Minister could tell us a little about the story of that generation of new tier two capital arrangements. 

For the time being, I will draw my comments to a close, but I might ask the Minister for further clarification. 

The Economic Secretary to the Treasury (Sajid Javid):  Clause 42 makes changes to make it clear that the coupon on tier two regulatory capital instruments will continue to be tax deductible for issuers, and that such instruments will be treated as what one might call normal commercial loans for the purposes of tax grouping rules. That retains the status quo. The equivalent debt capital instruments currently in use are treated as tax deductible. 

Let me briefly provide hon. Members with some background to the clause. Tier two instruments are subordinated unsecured debt instruments that form a key part of a bank’s capital. They have a minimum maturity of five years and may be redeemed only at the discretion of the issuer. Such debt instruments enable banks to raise funding to strengthen their capital positions and to facilitate onward lending to the wider economy. 

When issuing tier two instruments, banks must ensure compliance with regulatory requirements. Tier two capital instruments that banks are issuing now include terms that ensure compliance with the forthcoming EU capital requirement directive, known as CRD 4, and with current and forthcoming rules relating to capital adequacy in the United Kingdom. The new regulatory requirements are designed to ensure that banks improve the quality and quantity of their capital base to absorb losses and to protect depositors and the taxpayer. However, the requirements make the tax treatment of tier two instruments under current rules uncertain, because existing tax law predates CRD 4 and was not written with such types of instrument in mind. 

The Government already have powers, provided by the Finance Act 2012, to make regulations to prescribe the tax treatment of such instruments once CRD 4 is finalised. 

3.59 pm 

Sitting suspended for a Division in the House.  

4.18 pm 

On resuming—  

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Sajid Javid:  The Government already have the power under the Finance Act 2012 to make regulations to prescribe the tax treatment of tier two instruments once CRD IV has been finalised. When the Government assumed those powers last year, the intention was for CRD IV to take effect in January 2013. By last October, however, it had become clear not only that CRD IV would not be agreed before the year end but that banks needed to start issuing tier two instruments that included the new regulatory features. To provide the certainty that banks needed to enable them to continue to use tier two instruments to raise capital, the Financial Secretary to the Treasury clarified the tax treatment of such instruments in a written ministerial statement on 26 October. Clause 42 gives effect to that clarification, which applies from the time of its announcement last October. 

James Duddridge:  Has the Minister considered concluding his remarks and moving to a vote, given that there are no Labour Back Benchers here at all and only the shadow Minister has bothered to turn up to the debate? Has the Minister considered the merits of such a move, or is it simply childish to make that point? 

Sajid Javid:  I think my hon. Friend is pointing out the new iron discipline that exists on the Opposition Benches. However, as I am in a generous mood, I will not take advantage. 

Chris Leslie:  Returning to the topic, though, the Minister mentioned the timetable for tier two instruments, but can he say a little more about the Budget announcement about rules on interest deductions for additional tier one capital, which he said at the time would be implemented in due course? When will the Department publish the details of those additional tier one instruments? 

Sajid Javid:  It is important to point out that the clause relates to tier two only, but because I am in a generous mood, and if you will allow me, Mr Crausby, I will try to answer the hon. Gentleman’s question. The Government announced that the coupon on additional tier one capital would be tax-deductible. The regulations and the power included in the Finance Bill 2012 will be used to achieve that, which will remove similar uncertainty to that which applied to tier two. It will make our financial system stronger by encouraging banks to ensure that they have sufficient capital to withstand any future financial crisis. The additional tier one measure will not have an Exchequer cost because it replaces existing stocks of hybrid capital that were already tax-deductible. I will discuss the timing when I address the hon. Gentleman’s amendment. 

The changes made by clause 42 will mean that the coupon on a bank’s tier two loans will not be prevented from being deductible as interest in computing taxable profits. The changes will also make it clear that a bank’s tier two loans are normal commercial loans for the purposes of corporation tax grouping rules. The changes will not apply if a loan forms part of a scheme or arrangement where one of the main purposes is the avoidance of tax. 

Amendment 11 asks that the Government publish details of changes to tax revenues and of each other change in respect of the treatment of regulatory capital

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requirements and tier one capital. Let me first clarify exactly how banks and other regulatory capital instruments will be treated for tax. 

Consistent with long-standing rules that apply across the economy, banks’ tier one equity capital will not be deductible for tax purposes. In this year’s Budget, the Government announced that they will legislate to clarify that banks’ additional tier one debt capital instruments will be tax-deductible for corporation tax purposes. The issues around additional tier one capital instruments are similar to those around tier two instruments in that they now include terms to comply with CRD IV. Those features will ensure that banks improve the quality of their capital base to absorb losses and to protect depositors and the taxpayer, but the tax treatment of such instruments is uncertain under current rules. The changes made in respect of additional tier one instruments will be made once CRD IV is agreed through regulations made by the affirmative procedure, using the powers provided in the Finance Act 2012. 

In setting out the new treatment of the instruments, there is an implication that we have somehow given a new relief by stealth. That is clearly not the case. Our announcements merely clarify that new tier two and additional tier one debt capital instruments will continue to be subject to the existing and long-standing tax treatment for such regulatory capital instruments, and that banks are not being given any kind of preferential tax treatment over other sectors. Other industries are not subject to the requirements of CRD IV and so continue to get a tax deduction on their long-term debt instruments without any need for legislative clarification. 

Chris Leslie:  Just to be clear, the Minister is saying that existing tier one equity is not tax-deductible, but additional tier one capital will be tax-deductible. People could therefore reasonably assume that that is a subsidy of sorts for banks. 

Sajid Javid:  I thank the hon. Gentleman for his question—it is important to clarify the matter and get it right—but I am afraid that his understanding is incorrect. The current situation is that tier one capital is non tax-deductible, and that will not change; tier one will remain non tax-deductible. What is called additional tier one in CRD IV phraseology is virtually the same as what is currently referred to as hybrid capital, and it will remain tax-deductible. I hope that is clear. 

Chris Leslie:  The clue, surely, is in the word “additional”. If the banks, because we as a society deem that a certain amount of safety is needed in their capital base, are being required to post additional tier one capital and deductibility is therefore associated with that, it is a tax advantage to an industry that would otherwise provide for its safety without that tax advantage. It is a choice that the Treasury is making. The Treasury could decide that the tier one restrictions on deductibility would also, for example, apply to additional tier one capital, could it not? 

Sajid Javid:  I am afraid that shows a lack of understanding among the Opposition of how bank capital works. To be clear, all debt instruments issued by banks are tax-deductible for corporation tax purposes.

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What is not tax-deductible is shares, or what we might call equity. Equity remains non tax-deductible. Any shares issued by any bank will not be tax-deductible for corporation tax purposes, which is consistent with any other company that might not be a bank. 

Also for consistency’s sake, if banks issue debt instruments, they will be tax-deductible and will remain tax-deductible for corporation tax purposes. Additional tier one is a debt instrument. In terms of subordination, it would be first in the pecking order if a bank were to fall into trouble. That is referred to in the current situation, without CRD IV, as hybrid capital. CRD IV will change the phraseology so that a common phraseology will be used throughout the European Union. It will change the definition of additional tier one from hybrid capital to additional tier one. 

While discussing this clause, we have said that we as a Government will not change the tax treatment of that capital. That is how it has been treated for as long as I can remember, because it is a debt instrument. Also, importantly, it is the same treatment applied by every other country in Europe. 

Chris Leslie:  Just to clarify, is it not the case that the regulatory requirements will force the banks to hold a far greater volume of hybrid capital instruments? 

Sajid Javid:  We do not have the final form of CRD IV yet, but its intention is to have a situation where banks hold more loss-absorbing capital, which will include tier one, additional tier one and tier two. That is the overall policy intention, and this Government support it, given the importance of the banking system to the wider public and the implications for the taxpayer if things go wrong. 

That is the intention, and the Government want to clarify that banks will be able to work with the information when they issue those instruments. They are already starting to issue tier two instruments to replace maturing or redeemed tier two instruments, and we want to ensure that they will continue to get the same tax treatment as currently. That is the purpose of the policy. It is a continuation of existing policy, but the need for clarification has arisen as a result of CRD IV. 

Chris Leslie:  I am truly grateful to the Minister for his kindness in giving way so frequently. His generosity reflects extremely well on him. I wonder whether I might press him further on this point. The banks have been judged as not safe unless they rapidly and significantly increase their capital base, particularly in respect of tier two capital instruments and hybrid capital instruments. Therefore, as a society we are saying, “This is the amount of capital that they should hold.” Therefore, there is a quantum increase in the amount of tax deductibility—is there not?—for the proportion of capital that those banks will be taking. 

4.30 pm 

I am not sure that the Minister intends to, but he almost gives the impression of saying, “Oh, don’t worry about this. It’s business as usual and no particular change is involved here.” However, very significant sums of extra capital are required. Therefore, the amounts of tax deductibility for that capital are changing, are they not? 

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Sajid Javid:  As banks respond to CRD IV and build up their capital base, to the extent that they do that with additional tier one instruments—currently referred to as hybrid debt—and tier two, they will continue to receive the same tax treatment on that as they do today. That is the importance of this clarification. We want to ensure that banks can be confident as they look at ways to boost their capital—which in turn makes the banks more secure and safe to the advantage of all—that they continue to receive the same tax treatment that they already receive for that type of instrument. 

Chris Leslie:  Is that the same arrangement that applies in all other international jurisdictions? 

Sajid Javid:  For tier two, as far as I am aware. I cannot think of a single country that does not treat tier two or tier two-like instruments as tax-deductible. If the hon. Gentleman wants to ask me any other questions on this— 

Chris Leslie:  I would, actually. It is very kind of the Minister; he is being particularly generous today, to his credit. The bank levy is calculated on a complex formula related to the balance sheets of banks. It would be helpful if the Minister clarified whether additional tier one—those hybrid debt instruments that he talked about—are being factored into the bank levy calculations. 

Sajid Javid:  The bank levy is on the assets of banks. We are talking here about the liabilities of banks, so it should not make any difference, as it is on the assets. There were lots of questions from the hon. Gentleman and I hope I have cleared up that point. 

Kwasi Kwarteng (Spelthorne) (Con):  I have been sitting here amazed that we have spent 10 minutes of valuable Committee time establishing that hybrid capital is treated as a debt instrument, which it has been ever since it was created in the late ’90s. That is not controversial or a matter about which there has been any debate. Everyone knows that hybrid capital is treated for tax purposes as a debt instrument. That has always been the case. 

Sajid Javid:  My hon. Friend raises an important point. We know that one reason our banking sector got into so much trouble in 2007 and 2008 was because the previous Government did not understand banking. We can see that now from the questions we have received. Over the past 10 minutes I have had to educate those on the Opposition Front Bench on the basics of bank matters. I do not mind doing that but I do not think it is the purpose of the clause. 

Ian Mearns:  I am grateful to the Minister and wonder whether he could educate these poorly educated Members a little further. Once the CRD IV regulation requirements come into the place, tier two capital must have more loss-absorbing features. Will he explain to an uneducated Opposition Back Bencher the nature of those loss-absorbing features of tier two capital under the directive? 

Sajid Javid:  Tier two capital can take various forms, but what CRD IV will set out is what is classified within the European Union’s context as tier two. Up until

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CRD IV each country had a different approach. So some of the common features will be that it has to have a maturity of more than five years and that in the event that a bank is in trouble and so needs to take what is called a loss-absorbing activity, the tier two instrument must be forcibly converted. Most likely it will be converted into shares, but how that conversion takes place can be different for each institution. I hope that helps the hon. Gentleman. 

The legislation does nothing more or less than clarify what is already in place. We believe that it is fair and consistent. It removes any uncertainty for banks and investors which would otherwise negatively impact on banks’ ability to issue new instruments. There is no need to produce a forecast for the effect of the policy’s change because there is no policy change. As with all tax rules, the Office for Budget Responsibility will instead take account of the Exchequer impacts as part of the general fiscal forecasts. Therefore, as clause 42 only clarifies the current position of the law and there is no policy change, the amendment is not needed. 

In conclusion, clause 42 makes it clear that the coupon on tier two regulatory capital instruments will be tax-deductible for the issuer and the issue of tier two instruments will not affect the tax grouping rules. The clause removes uncertainty for banks and investors which would otherwise negatively impact on a bank’s ability to issue new instruments, funding that will enable banks to strengthen their capital positions and to facilitate onward lending to the wider economy. The amendment calls for a revenue forecast for the change in tax treatment that has not happened. I therefore ask the hon. Gentleman to withdraw the amendment. 

Chris Leslie:  I am grateful to the Minister even though from time to time his remarks can seem slightly patronising. I am sure that is not intentional. He is, after all, the brightest person in the room. He is a former banker at Deutsche bank. I am sure his fingers are covered in the evidence of various capital instruments at various different levels. We expect great things of him in the future. For those of us who are mere novices when it comes to these practices, he helpfully and in a very slow and clear way told the Committee that we should not worry our pretty little heads that there is any policy change involved in this matter. There is nothing changing here whatever. There is nothing to see. Move along. There is nothing to worry about. Clearly the Minister knows exactly what he is talking about in all respects. That is very reassuring. 

However, he talked about tax treatment. He did not talk about tax revenues as much as I would have liked. He gave the impression that there was no change of policy and yet we have a clause here which, as far as I can see, changes policy; otherwise, there is no reason to have it in the Bill. In fact the hon. Member for Spelthorne joined in the general narrative that there is nothing to look at here, so please move along. Why, he asked, dwell on the tax treatment of the banking sector because, didn’t we know, tier two has always been treated this way? I am surprised that we need a clause at all if that is the case. I am sure the hon. Gentleman can explain why, if there is no change, we are having a change here in the tax code. 

It is important that our constituents get some transparency in understanding how the Treasury is bending over backwards to accommodate the banking

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sector as it has on bonuses, as it has on the bank levy, consistently collecting far less than it was supposed to do. When it comes to the tax revenue implications of capital instruments, our constituents need to know the truth about what advantages might be provided not just by the changes in clause 42, but in the associated statutory instruments relating to additional tier one and tier one instruments. 

Kwasi Kwarteng:  My remarks were addressed purely and exclusively to the nature of hybrid capital, which, as its name suggests, is partly like an equity instrument and partly like a debt instrument. Historically, it has always been treated for accounting and tax relief purposes as a debt instrument. This is not something that has been invented in the past three months; it is something that is well known in the markets. That is the point I was making. 

Chris Leslie:  That is a very helpful clarification, but the hon. Gentleman must admit that there is a change of policy here. Even if it is a clarification, it is clearly something that required an intervention in the Finance Bill. It is not just a statutory instrument or a minor tweak that is consequential, supplemental and incidental to existing legislation; it is a clause in the Finance Bill. Therefore, it seems pretty harmless for the Committee to insist that the Treasury publishes details of the tax revenue implications of the change, and also those for tier one capital and hybrid instruments. 

I do not think the Minister said at any point that there will be no changes to tax revenue as a result of these changes. I am pretty sure that was not his comment, but I will give way to him if I have misheard in my naivety. In my simplicity, I may not have understood the complex nature of tax and the banking sector. The Minister does not wish to rise to speak, so I assume that there will be changes to tax revenue as a result of these measures. 

Sajid Javid:  There are not. 

Chris Leslie:  “There are not,” he says from a sedentary position. 

Sajid Javid:  Mr Chairman, I did not take up the hon. Gentleman’s invitation at first because I had already made the point. However, I am happy to clarify it again. This is a continuation of existing tax policy. The clause deliberately provides clarity to banks that currently have to issue tier two instruments in advance of CRD IV coming into practice. It is incumbent on the Government to provide that clarity, which is based on existing policy. In terms of its impact on tax revenue, there are no implications of issuing this clarification. 

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Chris Leslie:  The Minister talks about clarity, but that was one of the least clear remarks I have ever heard him utter. Let us be certain that clarity for the banks is absolutely paramount. However, when it comes to clarity for the taxpayer, there is absolutely none. He will not say that there will be no tax revenue implications from the changes in this amendment. It is important that we test the view of the Committee on this amendment. It is necessary for us to get some proper insight into the tax and revenue ramifications of these particular changes. I am sorry if our questions are naive, but it was the supposed intellect and insight that the geniuses in the banking sector had before the crash that got us into this mess in the first place. I am quite sure that the Minister was not one of those with responsibility for getting us into the mess. I would like to press the amendment to a vote. 

Question put, That the amendment be made. 

The Committee proceeded to a Division.  

Greg Hands:  On a point of order, Mr Crausby. I think that Mike Thornton and Stephen Williams might have been missed out. 

The Committee having divided: Ayes 12, Noes 17. 

Division No. 4 ]  


Ashworth, Jonathan   

Cryer, John   

Doughty, Stephen   

Evans, Chris   

Gilmore, Sheila   

Jamieson, Cathy   

Leslie, Chris   

Mearns, Ian   

Nash, Pamela   

O'Donnell, Fiona   

Pearce, Teresa   

Qureshi, Yasmin   


Baker, Steve   

Duddridge, James   

Gauke, Mr David   

Gummer, Ben   

Hands, Greg   

Javid, Sajid   

Jones, Mr Marcus   

Kwarteng, Kwasi   

Mills, Nigel   

Mowat, David   

Murray, Sheryll   

Offord, Dr Matthew   

Pugh, John   

Stephenson, Andrew   

Thornton, Mike   

Uppal, Paul   

Williams, Stephen   

Question accordingly negatived.  

Clause 42 ordered to stand part of the Bill.  

Ordered, That further consideration be now adjourned. —(Greg Hands.)  

4.46 pm 

Adjourned till Thursday 6 June at half-past Eleven o’clock.  

Prepared 5th June 2013