Finance Bill

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

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Public Bill Committee 

Tuesday 18 June 2013  


[Mr David Amess 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 191 

Reduced rate for energy-saving materials 

2 pm 

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

Catherine McKinnell (Newcastle upon Tyne North) (Lab):  I will pick up immediately where I left off before lunch. The Government further state in their “Summary of impacts”: 

“Only a small number of businesses, some of which are likely to be small businesses, are estimated to routinely work on the installation of ESM; these are expected to incur small costs from familiarisation with the new guidance and additional bookkeeping. A further 100,000 businesses who provide construction services may incur very minimal familiarisation costs.” 

If the Minister were to clarify what those small costs on average will be, that would help put the impact statement in context for the Committee. I ask because the charitable sector is concerned that this measure will in reality have more than a small impact on them, especially when taken in conjunction with other factors that are impacting on the sector. Many in the sector have argued that the VAT system currently poses one of the biggest challenges for the UK charity sector. 

As many Committee members know, VAT is underpinned by the premise that the cost of a service or product is ultimately borne by the final consumer, yet charities operate outside that underlying principle, as they rarely charge for the goods or services that they provide. The result is that charities face an unlevel playing field in many respects when it comes to VAT. The irrecoverable VAT is estimated to cost the sector £500 million a year and the costs of any VAT rises are borne by the charities themselves, which further exacerbates the problem. 

The VAT reliefs available to charities are therefore extremely important in going some way, in certain areas, towards correcting what many believe to be an unjust structural inconsistency. Zero and reduced rates are extremely valuable to charities, allowing them to undertake activities that are valuable to society and that would otherwise not be affordable. Many in the charitable sector are increasingly concerned about the gradual chipping away at many of those reduced rates, such as the VAT on supplies of research between eligible bodies and VAT on listed buildings. The removal proposed in this measure adds to that list. 

Given that these are already difficult times for the charitable sector, will the Minister tell us what assessment has been made of the cumulative impact on charities of the removal of various reduced rates, including this

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one? What commitment can he give the charitable sector that the Government will fight to retain reduced rates for charities and do whatever they can to maintain Government support for the sector, given the Prime Minister’s very open support for the charitable sector and his stated belief in the big society, which obviously requires that level of commitment from the Government in order to be sustained in these difficult economic times? 

The Exchequer Secretary to the Treasury (Mr David Gauke):  It is a pleasure to welcome you back to the Chair after lunch, Mr Amess. Clause 191 removes the reduced rate of 5% VAT applied to the installation, including supply, of energy-saving materials in buildings used solely for a “relevant charitable purpose”. This change follows legal action taken by the European Commission. The reduced rate for the installation of such materials in residential accommodation is left unchanged. 

Let me briefly provide hon. Members with some background to the clause. The UK currently applies a reduced rate of VAT to the installation, including supply, of energy-saving materials in buildings used solely for a relevant charitable purpose and in residential accommodation. The reduced rate of 5% VAT applies only where the installation of the materials is carried out in isolation or together with other works necessary to aid that installation—for example, cutting a loft hatch in a ceiling to install loft insulation. Any energy-saving materials installed as part of wider works—for example, a new extension—are already subject to VAT at 20%. 

The European Commission considers that the reduced rate has no legal basis, and it has taken legal action against the UK. The Government do not agree with all the arguments put forward by the Commission, but we have accepted that in applying the reduced rate for relevant charitable buildings we are applying the provisions too widely. Consequently, at Budget 2012, we announced our intention to withdraw the reduced rate from relevant charitable buildings as part of the 2013 Finance Bill. We will, however, continue to defend the reduced rate for the installation of energy-saving materials in residential accommodation. The Commission has now referred the case to the European Court of Justice. 

The clause removes the reduced rate of 5% VAT applied to the installation, including supply, of energy-saving materials in buildings used solely for a relevant charitable purpose. Only charities that use buildings for a non-business charitable purpose or as a village hall or similar will be affected by the change, which means that the installation of energy-saving materials in such buildings will become liable to VAT at the standard rate of 20%, whereas in the past they might have been eligible for the reduced rate of 5%. 

The change will not affect projects in those buildings where energy-saving materials are installed as part of wider building works, such as an extension, because they are already subject to the standard rate of VAT. Nor will it affect charities that use their buildings for business purposes, if those are not relevant charitable buildings. The reduced rate for the use of energy-saving materials in residential accommodation such as dwellings, old people’s homes, children’s homes, hospices and so on is not affected by the amendment. 

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The listed places of worship grant scheme may cover the cost of VAT incurred on repairs and alterations to listed places of worship, including the installation of energy-saving materials. Thus, the overall financial burden on listed places of worship should not be increased by the measure. 

Of the issues raised by the hon. Lady, one mentioned before lunch was the state of play with regard to defending the UK’s position in Europe on energy-saving materials. As she rightly points out, I cannot or will not disclose legal advice, but I can say that last summer the UK received from the European Commission the reasoned opinion that the provision for the reduced rate on energy-saving materials was ultra vires to EU law. We responded in August last year and heard nothing until February this year, when the Commission advised that it was proceeding with the infraction despite the UK withdrawing the reduced rate from relevant charitable buildings, and that it had referred the matter to the European Court of Justice. We have yet to hear from the ECJ, but the next step will be a written submission to the Court, when so requested. 

On the impact on charities of the specific measure, not all charities will be affected; only those charities that use their buildings solely for a non-business purpose, or as a village hall or similar, will be affected. The only projects affected will be those where works are supplied in isolation or with other works that aid that installation, such as cutting a loft hatch in a ceiling to install loft insulation. As a consequence of the change, therefore, the 20% rate would apply. Energy-saving materials installed as part of wider works to the buildings, such as a new extension, are already subject to the 20% rate of VAT. 

Projects to install energy-saving materials in residential accommodation will not be affected by the clause, so there will be no impact for charities that create residential accommodation, such as old people’s homes, children’s homes or hospices. Furthermore, affected bodies will have had 16 months between announcement and implementation of the withdrawal to prepare for the change. 

The hon. Lady sought to press me on assessment of the impact on charities of the removal of the reduced rate. Overall, it is estimated that the impact of the measure will be negligible, which for these purposes means less than £5 million. Details were set out in the tax information impact note published in the 2012 autumn statement. It is worth pointing out that the cost to businesses that install energy-saving materials will be limited to the costs associated with the time taken to familiarise themselves with amended legislation. That is the extent of it. 

The Government are committed to supporting the charitable sector and the hon. Lady will be aware of the size of support through the gift aid system, for example, which is considerable. We will continue to provide support in that way and others. 

The Government have accepted that we must withdraw the reduced rate of VAT that currently applies to the supply and installation of energy-saving materials in relevant charity buildings. The clause gives effect to that decision, and I hope that it will stand part of the Bill. 

Question put and agreed to.  

Clause 191 accordingly ordered to stand part of the Bill.  

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Clause 192 

Pre-completion transactions: existing cases 

Mr Gauke:  I beg to move amendment 60, in clause 192, page 113, line 26, after ‘rights)’ insert— 

‘(a) has effect subject to the amendment in subsection (1A) in relation to agreements for the grant or assignment of an option that are entered into during the period beginning with 21 March 2012 and ending immediately before the day on which this Act is passed, and’.

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 61 to 64. 

Clause stand part. 

Mr Gauke:  Clause 192 amends the stamp duty land tax rules on the transfer of rights to put beyond doubt the fact that particular stamp duty land tax avoidance schemes do not work. These avoidance schemes are the latest in a number of schemes that attempt to avoid stamp duty land tax on the purchase of property. In the 2012 Budget, the Chancellor made it clear that he expected people to pay stamp duty land tax when they purchased property, and warned that he would not hesitate to use retrospective legislation to close down future schemes. These changes will therefore apply retrospectively from 21 March 2012. 

I will provide some background to the clause. Stamp duty land tax contains provisions for a transfer of rights. This is when someone enters into a contract to purchase land but then, before completing the purchase, agrees either to transfer their rights under that contract to a third party or to sell the land on to a third party. These provisions currently result in only one charge to stamp duty land tax, which is on the ultimate purchaser, and the transaction involving the original purchaser is disregarded. The single charge reflects the economic reality of the transaction as the original purchaser never takes possession of the land. 

The transfer of rights rules have frequently featured in stamp duty land tax avoidance schemes and legislation was introduced in the Finance Acts 2011 and 2012 to close down two particular schemes. In the 2012 Budget, the Chancellor also announced a review of the transfer of rights rules to make them robust against attempted avoidance, and warned that he would not hesitate to use retrospective legislation to close down future stamp duty land tax avoidance schemes. 

Steve Baker (Wycombe) (Con):  My hon. Friend knows that on Thursday I will be dealing with some retrospection issues in my proposed new clause 1. Will he explain his thinking on why retrospection specifically is applicable and necessary in this circumstance? 

Mr Gauke:  We believe that there are circumstances where the Government must be able to take effective action to stop the aggressive marketing of tax avoidance schemes. That is only fair to the vast majority of taxpayers who comply with the letter and the spirit of the law. However, we have made it clear that retrospection should be wholly exceptional, but that when particular circumstances arise and it is necessary to take firm action we are prepared to do so. 

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2.15 pm 

In those circumstances, we have something that is clearly contrary to Parliament’s intention. The Chancellor has given a clear warning that we are prepared to use retrospective legislation in that area, and I believe that our response, in the circumstances, is wholly proportionate. Anyone who participated in the arrangements and was advised on them should be aware that the arrangements were clearly contrary to Parliament’s intention. For the vast majority of people who pay stamp duty land tax, where a transaction involves the sale of a property it is absolutely right that we address the behaviour involved, as we do in the clause. 

Nigel Mills (Amber Valley) (Con):  The Chancellor gave a clear warning that the Government would seek to tackle such things. It would be interesting if the Minister set out for the Committee whether, if another such scheme is used under different rules or the replacement rules, the Government will consider bringing in a retrospective rule to stop that or rely on the anti-tax abuse rule that will come into force on Royal Assent as as effective a block as is needed in those situations? 

Mr Gauke:  As I said a moment ago, in Budget 2012 the Chancellor made it clear that he was prepared to use retrospective legislation to close down future stamp duty land tax avoidance schemes, and that warning remains. I do not want there to be any confusion about that. The statement still stands. The behaviour that we address in the clause falls clearly within the scope of my right hon. Friend the Chancellor’s warning in 2012. 

Despite that warning, there has been an increase in the use of two schemes in particular. They are schemes that seek to delay the completion of the transfer of rights contract for a number of years, leaving the original purchaser in possession of the property without their having paid any stamp duty land tax. Although Her Majesty’s Revenue and Customs does not believe that the schemes produce the result claimed by their promoters, the schemes have continued to be marketed and used. It was appropriate, therefore, to act on the Chancellor’s warning last year and to introduce retrospective legislation to close the schemes down, and we might be prepared to do the same in the future if faced with similar circumstances. My hon. Friend the Member for Amber Valley is right that the general anti-abuse rule might be helpful in addressing the matter, but we have made it clear that that does not mean that we will refrain from taking other actions to deal with aggressive avoidance. The changes made by the clause will ensure that stamp duty land tax is paid by the true purchaser of the land, which in these schemes is the original purchaser. 

I turn now to Government amendments 60 to 64. The clause makes it clear that two particular avoidance schemes that abuse the SDLT transfer of rights rules are ineffective. Since the announcement at Budget 2013 that legislation would be introduced to put it beyond doubt that the two schemes did not work, HMRC has identified a third scheme that abuses the transfer of rights rules. 

That scheme has been used since the Chancellor’s announcement last year, and the Government amendments therefore address that matter. The scheme is a variation on the one, closed down at Budget 2012, that involved the original purchaser granting an option to a third

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party, entitling them to purchase the land at a future date. All the later scheme does is to insert a further step into the original arrangements, which it is claimed gets around the 2012 fix. It is obvious that the promoters and users of the scheme took no heed of the Chancellor’s warning, and it is only fair that action is taken now to prevent them from benefiting from the scheme. The Government amendments therefore include that scheme in the legislation, and the provision will be applied retrospectively from 21 March 2012. 

Catherine McKinnell:  The Minister has addressed the majority of the points I would have put to him, save for one clarification. It might be helpful for him to clarify that at this stage. 

The protocol on unscheduled announcements of changes in tax law set out three very particular sets of circumstances where a retrospective application and change to the tax law should be made, one being a significant risk to the Exchequer. However, the Government’s technical note does not make it clear what those risks are and what the assessment of them is. Therefore, it is not entirely clear whether the protocol applies in this case. That echoes the concerns raised by the hon. Member for Wycombe. If HMRC does not believe that the schemes produce the tax result claimed, will the Minister confirm that there is without doubt a significant risk to the Exchequer in this case? 

Mr Gauke:  I am grateful for that question. If there is an opportunity to deal with all the hon. Lady’s questions in my opening speech, that might help us to progress. Our argument is that this measure is consistent with the Government’s protocol on unscheduled announcements of changes to law, including the use of retrospective legislation. It falls within the class of being a wholly exceptional case. The reason is that there is a history of abuse in this area of the legislation. Indeed, we have already made that clear. The policy intent has been made clear. The Chancellor gave a clear warning at Budget 2012 that he would not hesitate to use retrospective legislation if abuse of the SDLT rules continued. 

It is also worth pointing out that HMRC believes that the particular schemes do not work, so ultimately HMRC would win in litigation; but that would take a considerable length of time. In those circumstances, it would be better to address the matter now by making the situation clear and putting it beyond doubt. As far as the tax at risk from the transfer of rights schemes is concerned, HMRC estimates that it is around £160 million over the next five years. Even though HMRC is confident that it would win any case, that is not an insignificant amount. It is an area where there has been repeated abuse and there have been repeated warnings that the Government will not tolerate that behaviour. In those circumstances, we believe that action in the case is justified, including retrospective action. 

As I have made clear many times before and I suspect will again on Thursday, retrospective legislation should be used with great care. I believe we have acted with great care in these circumstances. 

Steve Baker:  I did not wish to interrupt my hon. Friend in mid-flow, but I would like to take him back to where he said the schemes do not work. Will he be

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clear? Does he mean that they are unlawful, or that they are lawful but HMRC does not approve of them because they are clearly not in line with Parliament’s intent? Are they lawful or not? 

Mr Gauke:  The word “lawful” can lead to a degree of ambiguity. When people say it is not lawful, is it criminal? There is no criminal offence that one can see here. Is it effective under the law that currently stands for the taxpayer not to over-tax? Does it do what the promoter claims? Does it work in so far as the individual does not have to pay stamp duty land tax? The view of HMRC is that it is not effective; it does not do that. But clearly, if we can pass this legislation it avoids all questions of doubt and clarifies the position. We can deal with a form of avoidance that has rightly caused considerable public disquiet. It is not fair that, when the vast majority of our constituents pay stamp duty land tax when they acquire a property, there are some individuals—I was going to say that they are well advised, but they are least advised—who attempt to get round the rules. That is not right, so I commend the clause and my amendments to the Committee. 

Amendment 60 agreed to.  

Amendments made: 61, in clause 192, page 113, line 28, leave out from ‘into’ to end of line 29 and insert ‘during that period’. 

Amendment 62, in clause 192, page 113, line 29, at end insert— 

‘(1A) At the end of subsection (1A) insert “or an agreement for the future grant or assignment of an option”.’.

Amendment 63, in clause 192, page 114, line 30, at end insert— 

‘(6A) Subsections (8) to (10) apply where—

(a) as a result of subsection (1A) of this section, section 45 of FA 2003 does not apply in relation to a contract of the kind mentioned in subsection (1)(a) of that section (“the original contract”),

(b) the original contract was substantially performed or completed (or, in a case that would have fallen within subsection (5) of that section, substantially performed or completed so far as relating to the relevant part of the subject-matter of the original contract) at the same time as, and in connection with, the substantial performance or completion of an agreement for the grant or assignment of an option, and

(c) that time fell before the day on which this Act is passed.’.

Amendment 64, in clause 192, page 114, line 31, leave out from beginning to ‘apply’ and insert ‘Subsections (8) to (10) also’.—(Mr Gauke.)  

Clause 192, as amended, ordered to stand part of the Bill.  

Clause 193 

Pre-completion transactions 

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

The Chair:  With this it will be convenient to discuss that schedule 37 be the Thirty-seventh schedule to the Bill. 

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Catherine McKinnell:  As discussed under the previous clause, stamp duty land tax schemes have sought to exploit uncertainties in current legislation. We therefore welcome the removal of such uncertainties through amending and supplementing the existing legislation or through drafting a replacement set of rules. However, concerns have been expressed by the industry regarding the drafting of the clauses, given that, for example, new schedule 2A of the Finance Act 2003 will have 104 sub-paragraphs in place of the current nine subsections of section 45 of that Act. 

The Chartered Institute of Taxation said: 

“The draft clauses have been formulated as a complex set of prescriptive rules. Legislation of this nature tends to create opportunities for structuring transactions in a way that is not intended thereby defeating its object of preventing abuse. We do not think this is the right approach to tightening these rules.” 

The institute also shares the concern of the Stamp Taxes Practitioners Group that the new legislation is likely 

“to severely hamper genuine commercial and residential property transactions because it is not readily intelligible to conveyancers and property lawyers who will need to apply it in practice. The drafting is tortuous, subsales (the most common type of transaction covered by the draft clauses) are variously defined as ‘pre-completion transactions’, ‘free-standing transfers’ and ‘qualifying subsales’. 

Practitioners do not recognise the estimate of numbers of transactions that are likely to be affected by these provisions. There appears to be a significant under-estimate of the likely number of such transactions.” 

HMRC has promised clear guidance upon which taxpayers and their advisers will be able to rely. However, I am sure the Minister will agree that, particularly where guidance attempts to soften the harsher effects of prescriptive legislation, there is a fine line between interpretation and concession, which goes beyond HMRC’s powers. If guidance crosses the line into concession, the ability to rely on that guidance is thrown into doubt. Will the Minister outline what process will be undertaken to ensure that the guidance is clear and fit for purpose and will not fall victim to such pressures? 

It is perhaps inevitable that the guidance will not be able to cover every possible situation, but a number of situations have been highlighted because there is concern that the guidance will not clarify them and that they will remain distinctly unclear. If the Minister is aware of the Chartered Institute of Taxation’s concerns about the technical application of the new legislation and the guidelines, it would be helpful if he could provide reassurance that they have been considered by HMRC and the Government in drafting the provisions. 

The institute has raised a number of issues, which I will not go into for the sake of brevity. However, will the Minister comment on the variety of concerns that have been expressed about the drafting of the legislation and the lack of clarity? The new legislation could facilitate additional avoidance rather than deliver the intended aim, which, as the Minister says, is that everyone pays stamp duty land tax fairly and equitably. 

2.30 pm 

Mr Gauke:  Clause 193 will reform an area of the stamp duty land tax code that has been the subject of extensive attempted avoidance. It will apply to transactions that are currently known as transfer of rights, which will in future be called pre-completion transactions.

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The new rules are designed to replicate the tax outcome of the current rules for commercial transactions, but to be robust against attempted abuse. 

The transfer of rights rules cover situations in which someone enters into a contract to acquire land and then enters into a further agreement before completing the purchase—either to sell on the land, or to sell their rights to the land. The rules determine how much tax the final purchaser should pay and allow the initial purchaser to disregard the acquisition if certain conditions are met. 

Over a number of years, there have been repeated attempts to devise SDLT avoidance schemes using the transfer of rights rules. Such attempted abuse has continued in the face of several small legislative changes to put beyond doubt that such schemes do not work. At Budget 2012, the Chancellor therefore made it clear that continued attempted abuse would not be tolerated. Among other things, he announced that HMRC would consult on reforming the transfer of rights rules, and the clause and the schedule are the outcome of that consultation. 

Clause 193 will introduce a new set of rules for pre-completion transactions, replacing and superseding the current rules for the transfer of rights. Although the new rules are similar in scope to the old ones, they contain three major differences. First, the initial purchaser will no longer be able simply to disregard the initial transaction; instead, the initial purchaser will have to claim relief in a normal land transaction return. The relief will be available only for pre-completion transactions that are sub-sales or assignments. 

Secondly, relief for the initial purchaser will be subject to an avoidance purpose test. Relief will not be available when the pre-completion transaction forms part of arrangements for avoiding tax. Thirdly, the ultimate purchaser will be subject to a minimum consideration rule if they are connected with, or not acting at arm’s length from, the initial purchaser, which will ensure that the ultimate purchaser is charged an appropriate amount of tax. 

The hon. Member for Newcastle upon Tyne North raised concerns about the length and complexity of the legislation. It would be fair to say that there can sometimes be a tension in tax law between brevity and clarity. We have sought to make the legislation as clear as possible, although I accept that that has been at the expense of brevity. Part of the problem is that the current legislation applies the same rules to a number of different types of transaction. That makes the legislation succinct, but its brevity has led to the perceived lack of clarity that I mentioned. 

In the public consultation on the revision of the rules, there were calls for the types of transaction to be differentiated and the tax treatment to be made clearer. We therefore decided to unpack the different transactional processes and to show the tax impact at each stage. The unpacking of the creation of deemed transactions added to the complexity, which had previously been avoided by a complete disregard of the first transaction. The level of attempted abuse meant that the disregard could no longer be retained. The legislation became more complex to ensure that all intermediate transactions were catered for when they had previously been disregarded. 

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The hon. Lady also asked about guidance. HMRC has issued draft guidance that includes examples of how a range of scenarios should be treated. That guidance covers common and straightforward situations, as well as some more complex ones. HMRC has invited comments on how the guidance can be extended and improved in the run-up to the new rules coming into effect, and that guidance will ultimately be included in HMRC’s SDLT manual. I hope that that provides hon. Members with all the information required. 

The measure forms part of the Government’s actions to make sure that purchasers of land pay their fair share of tax. It is designed to make it clear that this aspect of the SDLT rules cannot be abused to avoid tax. 

Question put and agreed to.  

Clause 193 accordingly ordered to stand part of the Bill.  

Schedule 37 agreed to.  

Clause 194 

Relief from higher rate 

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

The Chair:  With this it will be convenient to discuss that schedule 38 be the Thirty-eighth schedule to the Bill. 

Catherine McKinnell:  The clause and schedule provide for extended reliefs from the 15% STLD higher rate that was introduced in the Finance Act 2012. Among other things, the new reliefs extend the relief for property development trades and provide additional reliefs for a wider range of commercial uses. All the reliefs are subject to clawback if any of the stated conditions are not met during a specified period. 

Some in the industry have expressed concern that the reliefs for which the Bill provides will be introduced with effect from Royal Assent, whereas the higher rate of SDLT has applied since 21 March 2012. The delay in implementing the reliefs means that genuine businesses will have every reason to defer transactions until after Royal Assent, which would have a distorting effect on economic behaviour. Although those in the industry recognise an understandable wish to ensure that the scope and drafting of the reliefs are correctly framed, they are struggling to understand the practical bars to aligning the availability of the reliefs with the higher rate charge. Will the Minister clarify for the Committee the reasons behind the delay in implementing the reliefs? 

There is also one commercial situation that does not appear to be covered by the proposed reliefs: if an existing business such as a hotel, school or care home acquires a high-value dwelling in order to convert it and run it as part of its trade, rather than reselling it. The extended relief for redeveloping property appears to preclude such relief because of the references to resale, so will the Minister confirm the position with regard to that situation? 

Mr Gauke:  The clause and schedule introduce a series of reliefs to the 15% rate of stamp duty land tax on residential property valued at over £2 million purchased

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by certain non-natural persons. As I described during our debate on the annual tax on enveloped dwellings, that term encompasses companies, partnerships that include a company, and collective investment schemes. The reliefs mirror as far as possible those being introduced for the annual tax on enveloped dwellings and for the extension to the capital gains tax regime. 

The 15% rate of stamp duty land tax was introduced in 2012 as part of a package of measures aimed at tackling stamp duty land tax avoidance through the use of corporate enveloping. Under that process, a property is placed into a vehicle, often as the only asset of a company. The property can then effectively be sold by transferring the shares within that company and that transaction will not be subject to stamp duty land tax. We discussed the rationale for the measures during our consideration of the Finance Act 2012 and again during the debate on the annual tax on enveloped dwellings and the extension to the capital gains tax regime, so I do not intend to rehearse all the arguments now. 

Clause 194 introduces schedule 38, which contains the reliefs. Paragraph 2 replaces the existing relief for property developers with reliefs for businesses of letting, trading in or redeveloping properties, trades involving making a dwelling available to the public, financial institutions acquiring dwellings in the course of lending, dwellings for occupation by certain employees or partners, and farmhouses. I do not intend to discuss each relief in detail as they echo the arrangements that we considered at some length for the annual tax on enveloped dwellings. 

There is, however, one important variation. For each relief, the schedule inserts a new measure that provides for a three-year period during which, if conditions change so that the relief would have no longer applied at the point of purchase, the relief is withdrawn and the tax becomes payable, which is sometimes called the clawback period. This important feature is designed to protect against avoidance whereby temporary arrangements are deliberately made to avoid the 15% rate. The three-year clawback rule is a feature of other reliefs in stamp duty land tax, in particular group relief and charities relief, and the reliefs will take effect from Royal Assent. 

The hon. Member for Newcastle upon Tyne North asked why the 15% reliefs are not being introduced until Royal Assent. The annual tax on enveloped dwellings has reliefs that are in effect from 1 April, which was carefully considered. The ATED will not be payable until after Royal Assent, so any changes that might have been necessary to the reliefs could be communicated and assimilated prior to a return being due, but the 15% rate is a tax on a transaction whereby tax must be paid within 30 days of the transaction. The Finance Bill becomes law when it receives Royal Assent. Until then, it is subject to change through the parliamentary process, so changes to the proposed reliefs during that time could cause difficulties for transactions in progress. Allowing the reliefs to take effect earlier than Royal Assent would cause a degree of uncertainty for taxpayers for that reason. Royal Assent is only a limited time away—I hope—so it would make little sense to change the start date at this point. Given the period of time concerned and the number of properties for which transactions may be delayed, we believe that the disadvantages outweigh the advantages. 

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The hon. Lady also asked why there is no relief from the 15% rate for businesses that wish to purchase a residential property and convert it to non-residential for use in their trade, such as a care home. It is a general feature of the SDLT rules that there is a different rate for property that is residential or non-residential at the time of purchase. The rules are even-handed at present in that although a higher rate will apply to residential property for conversion, a lower rate applies to non-residential property that is acquired for conversion to residential. Additionally, such a relief could open up avoidance opportunities with companies claiming non-residential intentions to take advantage of the lower rate, but then not following through with the conversion. Although we could apply a clawback provision, we could still have anomalous situations in which the conversion could not proceed within the relevant time, so the rule might not solve all potential problems. It might be difficult to determine how much time to allow for the conversion to take place as well as for other operational complexities, such as knowing whether the property will be or is being used for non-residential purposes. 

Question put and agreed to.  

Clause 194 accordingly ordered to stand part of the Bill.  

Schedule 38 agreed to.  

Clause 195 


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

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 103 to 106. 

That schedule 39 be the Thirty-ninth schedule to the Bill. 

2.45 pm 

Mr Gauke:  Clause 195 and schedule 39 simplify the stamp duty land tax rules that apply to certain lease transactions. Approximately 22,000 taxpayers are expected to benefit from the changes, which will reduce compliance costs by up to £150 per business. 

In most cases when a person acquires land or property, stamp duty land tax is paid only once. Certain transactions involving leases can require the purchaser to make further notifications to HMRC, for example when the lease is extended or there is an abnormal increase in the rent. Some of the provisions are complex and onerous for the taxpayer, who may not be aware of his or her ongoing liability. HMRC has been working with its stakeholder group for some time to identify areas of legislation that would benefit from simplification. Three areas under provisions on leases were identified as priorities for such simplification, so we have taken action. 

The clause introduces schedule 39, which will abolish the rules on abnormal rent increases, simplify the reporting requirements when a lease continues after the expiry of its fixed term, and simplify the reporting requirements when an agreement for a lease is substantially performed

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before the actual lease is granted. As I have said, those three areas of the provisions on leases were identified by the stakeholder group as priorities for simplification. HMRC has continued to consult interested parties throughout the process to ensure that the measures give the desired result. 

As I said, the clause and schedule are intended to simplify the reporting requirements for certain lease transactions, including when a lease continues after the expiry of its fixed term. However, in some circumstances, the interaction of such changes with another provision under existing legislation would result in the taxpayer being required to subject a return under both provisions for the same period. The potential interaction of the two provisions was not recognised during the consultation period prior to the drafting of the Bill. It is not intended that two returns should be required; indeed, that would go against the objectives of the changes made under schedule 39. Government amendments 103 to 106 will therefore ensure that only one return is required in such circumstances. 

For those affected, the changes will streamline the reporting requirements and reduce the administrative costs for business. They support the Government’s objective of simplifying the tax system, so I hope that the Committee will agree to amendments 103 to 106, the clause and the schedule. 

Catherine McKinnell:  The Government have stated that their intention behind the abnormal rent increase regime is to prevent the parties from at least agreeing to a low or minimal rent for the first five years with an abnormal increase in year six, thereby reducing the SDLT charge over the long term. However, many in the industry consider that the rules are highly unlikely to counter abuse because, commercially, a landlord would not forgo the rent in the first five years of a lease to provide an SDLT advantage for a tenant, especially as the direct tax rules would mean that the landlord suffered tax on the rents forgone. 

In their impact note for the measure, the Government state that 9,000 businesses a year will benefit from the reduction in administrative form-filling. It would be useful to know how HMRC has arrived at that figure and what the breakdown is of the number of businesses that will benefit from the change to leases held over, compared with the number of businesses that will benefit from the changes to agreements for leases. 

HMRC also estimates that 13,000 businesses will benefit from the change by not having to carry out the complex calculations needed to determine whether their rent increase is abnormal. Again, it would be helpful to understand the basis of that estimate. As the provisions are being repealed, what assurance can the Minister give that the avoidance that was originally targeted by these measures no longer presents a problem or risk for HMRC? 

Mr Gauke:  If I may, I shall deal with the last question first, which was whether, as these provisions were brought in to deal with avoidance, removing them runs the risk of further avoidance. When stamp duty land tax was introduced in 2003 there was a perceived risk that rent

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payable under a lease could be structured to avoid the tax. The normal rent increase rules were introduced in 2004 to address that risk. Experience over the years that the tax has been in operation has shown that the risk has not materialised: leases are not structured to avoid stamp duty land tax in such a way. It was therefore right to abolish the rules, although HMRC will keep this area of tax under review to ensure that no new avoidance opportunities emerge. It should be pretty clear to the Committee that the Government’s determination to deal with stamp duty land tax avoidance is strong. We will take action where necessary. In light of the experience that HMRC has had over eight or nine years, it was felt that there was an opportunity here to make a simplification. 

The hon. Lady also asked me to break down some of the estimates of entities that will benefit from these changes and the value of that benefit. We do not have any numbers that further break down the benefits and the beneficiaries beyond what has been published. I know she has read the tax information and impact note, and I do not have further numbers that can break that down more precisely. I hope that she will appreciate that this is a measure that, without increasing avoidance risk, will help to benefit a number of businesses and reduce the regulatory burden where we can. 

Question put and agreed to.  

Clause 195 accordingly ordered to stand part of the Bill.  

Schedule 39 

Stamp duty land tax on leases 

Amendments made: 103, in schedule 39, page 465, line 12, leave out from beginning to ‘Sub-paragraph’ in line 13 and insert— 

‘(2A) After that sub-paragraph insert—

(3A) But no tax or additional tax is payable in respect of a transaction as a result of the continuation of a lease for a period (or further period) of one year under sub-paragraph (2) if, during that one year period, the tenant under the lease is granted a new lease of the same or substantially the same premises in circumstances where paragraph 9A applies.”

(3) After sub-paragraph (3A) insert—

“(3B) ’.

Amendment 104, in schedule 39, page 465, line 40, leave out ‘fixed’. 

Amendment 105, in schedule 39, page 465, line 42, leave out ‘fixed’. 

Amendment 106, in schedule 39, page 468, line 20, after ‘2(2),’ insert ‘(2A),’.—(Mr Gauke.)  

Schedule 39, as amended, agreed to.  

Clause 196 

Standard rate of landfill tax 

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

Catherine McKinnell:  This is another short, technical clause. It amends the Finance Act 1996 to increase the standard rate of landfill tax for disposable waste made or treated as made on or after 1 April 2014. In the June 2010 Budget the Government announced that the standard

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rate of landfill tax would rise by £8 per tonne on 1 April each year up to and including 2014. The clause therefore provides for that rise to the standard rate of landfill tax from £72 to £80. The Government also announced a floor under the standard rate of landfill tax so that it would not fall below £80 per tonne from 2014-15 to 2019-20. Will the Minister say whether the Government will reduce further annual rises in the standard rate of landfill tax after 2014, or will it remain at £80? The Government announced at Budget 2013 that the lower rate of landfill tax for less polluting qualifying waste, currently £2.50 per tonne, will remain frozen in 2014-15. Will the Minister tell us what impact assessments have been carried out on the freeze? Is he also able to give us insight into the Government’s plans for the lower rate of landfill tax beyond 2014-15? That would be helpful to the Committee. 

John Pugh (Southport) (LD):  I have spent an unusual amount of time recently looking at landfill because I am doing a stint with the Industry and Parliament Trust and, for my sins, I opted to go for waste recycling as something I was particularly interested in. I have spent a good deal of time talking to people who either pay landfill tax or contribute to the industry in some way. My view is that it is an excellent tax. It follows, of course, from an EU directive and as a fiscal instrument it works pretty well, in the sense that we are now recycling, reclaiming and reprocessing a great deal. 

We are also burning a great deal, although we do not talk about incinerators now. We talk of many of the facilities as creating energy from waste, because we do not want to use the word incinerator. There is a tension between incineration and recycling, which probably most people will be aware of. Incinerators need to be kept at a certain temperature, need to be fed all the time and, once built, need to be kept working year after year. 

Hon. Members should be aware that the process of administering the landfill tax is heavily bureaucratic. There are probably more people involved in the paperwork associated with shifting waste around the country than in actually shifting waste around the country, with a lot of unnecessary on-costs. 

I am concerned about where we are heading in the long term. There has clearly been a dramatic change in behaviour by local authorities, waste disposal authorities and so on, because costs have gone up appreciably. Fifty years ago it was about only £22 per tonne and now it is heading towards £80 per tonne. The Government have done things in addition to putting up the cost. They have dropped the landfill allowance trading scheme and withdrawn PFI credits from a number of waste disposal authorities that recycle waste or use it effectively rather than have it go to landfill. 

There is a possibility that a few years down the line this could indirectly be a stealth tax. I was reading earlier, by coincidence, a submission from the Liverpool city region about waste disposal in its area. It reckoned that it was heading for very promising figures. It said it was recycling pretty well 90% of its waste, but then there would be 10% left that could not usually be disposed of in whatever way, through incineration, recycling or reuse. Some things at the end of the day are safest put into land. Asbestos is something that primarily has to go into land. That is the only satisfactory way to dispose of it. 

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I want to know what will happen when certain waste disposal authorities have responded to the nudge and the fiscal imperative and got to a point where they can go no further and where it is the rational, sensible thing to stick stuff into land. Will they continue to be taxed? In which case, will the tax perform simply as a straightforward levy? It would be a kind a stealth tax that no one really noticed was being paid. 

Landfill has an ultimate value. I am told that wise people are buying old landfill sites on the grounds that it will soon become more cost-effective to reclaim metal from an old landfill site than to extract it from ore. I want to find out where the Treasury thinks we are heading. 

3 pm 

Fiona O'Donnell (East Lothian) (Lab):  I am interested to hear the hon. Gentleman say that there is interest in land that was used formerly for landfill. Does he think that that is linked to the fact that last year, the Government brought in legislation that loosened some of the restrictions on the use of possibly contaminated land? 

John Pugh:  The hon. Lady is a greater conspiracy theorist than I could possibly be. If we take into account the increase in landfill tax, the abandonment of the landfill allowance trading scheme and the withdrawal of PFI credits, which will make the landfill tax obligation easier to fulfil for some waste disposal authorities, we could be tempted to go down the road of suggesting that the Treasury, although we do not doubt its green credentials, has in mind a steady revenue stream for the future here, unless we can portray the landfill tax as what it is supposed to be under the EU directive: a fiscal instrument, designed to reduce landfill and no more. Will the Government tell us where they think we are ultimately heading with that particular tax? 

The Economic Secretary to the Treasury (Sajid Javid):  Clause 196 increases the standard rate of landfill tax from £72 per tonne to £80 per tonne with effect from 1 April 2014. By way of background, the landfill tax has been successful in reducing the amount of waste sent to landfill; since it was introduced in 1996, the amount of waste sent to landfill has nearly halved. The benefits of that reduction are twofold. First, the economy benefits from our making better use of valuable resources, rather than simply tipping them into a hole in the ground. Secondly, greenhouse gas emissions from decomposing waste are reduced. 

The landfill tax also plays a significant role in reducing the volume of waste sent to landfill to meet the targets set out in the landfill directive. That minimises the risk of incurring the substantial penalties that falling short of those targets would trigger. If waste is not sent to landfill, as we have just heard from my hon. Friend the Member for Southport, it goes to alternative, more sustainable waste management practices such as recycling. 

The June 2010 Budget confirmed that the standard rate of landfill tax would increase by £8 per tonne each year until 2014. The Government also confirmed that that rate would not fall below £80 per tonne between 2014 and 2020. By confirming that £8 per tonne increase for 2014-15, we continue to provide certainty for the

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waste management industry to invest in infrastructure for alternative means of waste disposal. 

The environmental impact of lower-rated waste is significantly less than that of standard-rated waste. The current rate adequately reflects that impact. Therefore, the lower rate of landfill tax, which applies to less polluting waste such as rocks and subsoils, will remain frozen at £2.50 per tonne for 2014-15. 

The increase in the standard rate of landfill tax will affect businesses and local authorities that send waste to landfill. However, by managing their waste more sustainably and reducing the amount of waste that they send to landfill, they will be able to reduce their landfill tax liabilities. In addition, the costs of the tax and the necessary investment in waste infrastructure were considered as part of the spending review process and included in the local government settlement. 

To turn more specifically to the questions raised, the hon. Member for Newcastle upon Tyne North asked about potential future changes in the rates. I confirm that we have set out that the standard rate of £80 will remain at least at that level between 2014 and 2020, which provides confidence to businesses that in the future it will not suddenly become cheaper for waste to be sent to landfill. Beyond that commitment, we have yet to make any policy decisions on the rate for the years between 2014 and 2020, other than that minimum level. The rates of landfill tax, as with any other tax, however, will remain under constant review. 

The hon. Lady also asked about the lower rate. We are comfortable that the environmental impact of the lower-rated waste is significantly less than that of the standard-rated waste, and that the current rate of £2.50 per tonne adequately reflects that impact. We will keep the rates under review, but we currently have no plans to change the lower rate. 

My hon. Friend the Member for Southport made a couple of points. He asked if we had considered the impact of the changes made under the clause. The Government do not routinely undertake an impact assessment on rate changes of this type—or on rate freezes—so there is no assessment in this case. He used, I think, the words “stealth tax” and said, if I understood correctly, that even when a local authority sends the maximum amount possible to alternatives to landfill, a small proportion of the total waste still needs to go to landfill, so the authority is unable to avoid a minimal level of landfill tax. His assessment is right, but that is a necessary feature of a tax system that incentivises people to use less landfill and look for alternative, more sustainable sources. 

The clause increases the standard rate of landfill tax, as announced at Budget 2010 and confirmed in Budget 2013, and I therefore move that the clause stand part of the Bill. 

Question put and agreed to.  

Clause 196 accordingly ordered to stand part of the Bill.  

Clause 197 

Climate change levy: main rates 

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

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Catherine McKinnell:  The climate change levy came into effect in April 2001. It serves as a tax on the non-domestic use of energy such as gas, electricity, liquefied petroleum gas and solid fuel by the business, service and public sectors, and is aimed at promoting energy efficiency and the use of renewable energy so as to meet the UK’s international and domestic targets for cutting greenhouse gas emissions. 

Since the rates were introduced in 2007, they have kept pace with inflation. The levy has, therefore, maintained its environmental effect, and on each occasion the rates have increased the changes have been legislated for in the previous year’s Finance Act—precisely what clause 197 provides for. I could say many things about the Government’s efforts to be, in their words, “the greenest Government ever”, but I will save my comments for our discussion under clause 198, to which we have tabled an amendment, and refrain from digressing here. 

Sajid Javid:  The clause increases the rates of the climate change levy from 1 April 2014, in line with retail prices index inflation. The new rates will apply to suppliers of taxable commodities to businesses and the public sector on and after that date. The clause increases the rates of the levy from April 2014 in line with RPI, which has been standard practice since 2007. If there are no questions from members of the Committee, I simply ask that the clause stand part of the Bill. 

Question put and agreed to.  

Clause 197 accordingly ordered to stand part of the Bill.  

Clause 198 

Climate change levy: supplies subject to carbon price support rates etc 

Catherine McKinnell:  I beg to move amendment 148, in clause 198, page 116, line 17, at end add— 

‘(2) The Chancellor of the Exchequer shall within one year of the passing of this Act provide a report to Parliament on the cumulative impact of the Carbon Price Support rates under Schedule 40 to this Act and changes to the EU Emissions Trading Scheme on the Government’s commitment to reducing carbon emissions.’.

The Chair:  With this it will be convenient to discuss the following: 

Clause stand part. 

That schedule 40 be the Fortieth schedule to the Bill. 

Catherine McKinnell:  As promised, we will now consider the climate change levy and our amendment to the clause. The issue of the carbon price floor has been much debated, and the explanatory note to the clause sets out the following: 

“In order to encourage new and additional investment in low-carbon power generation, the Government announced at Budget 2011 that, following consultation, it would introduce a carbon price floor from 1 April 2013, which it would achieve by amending CCL legislation…Supplies of coal and other solid fossil fuels, gas and LPG used in most forms of electricity generation would become liable to newly created CPS rates of CCL, which would be different from the main CCL rates levied on consumers’ use of these commodities”. 

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Despite the Government’s intentions and their wish to be the “greenest Government ever”, there are rising concerns about their ability to achieve their commitment to reduce carbon emissions. We therefore tabled the amendment to probe the Minister on what consideration they have given to those concerns and to enable him to explain what they are doing, and will do to, address them. The Minister will be well aware of recent events in the European Parliament regarding the EU emissions trading scheme. I see that rather than going swivel-eyed, many Members are now furrowing their heads down into papers and whatever electronic devices they have to look at rather than engage in what is no doubt a very difficult debate. 

Sheryll Murray (South East Cornwall) (Con):  I am not. 

Catherine McKinnell:  I am pleased that the hon. Lady is not. 

As the Committee will know, the EU emission trading scheme was launched in 2005 to combat climate change and was heralded as a major pillar of EU climate policy. The scheme works on a cap and trade basis, so a cap or limit is set on the total greenhouse gas emissions allowed by all participants covered by the system. That cap is converted into tradable emissions allowances, which are allocated to participants in the market. Participants who are likely to emit more than their allocation can choose between taking measures to reduce their emissions or buying additional allowances either from the secondary market, such as companies who hold allowances they do not need, or from member state-held auctions. However, in April this year, attempts to deliver a vital reform to the scheme failed thanks to the votes of a majority of Conservative MEPs and one Liberal Democrat MEP in the European Parliament. 

Rory Stewart (Penrith and The Border) (Con):  In the interests of proving that not everybody has their head in an electronic device, may I ask the hon. Lady to reflect a little on the fundamental principles underlying this form of carbon purchasing? Would she not agree with Professor Dieter Helm of Oxford university that it would be better to target taxation on the consumption rather than the production of carbon, and that the net effect of taxing the production of carbon in the European Union has simply been to drive carbon-emitting industries to places such as China, meaning that although our production is reduced, our consumption of carbon has significantly increased? 

Catherine McKinnell:  I thank the hon. Gentleman for that considered contribution to the debate. However, we are constrained in this Committee to debate the measures before us. The one before us now is the climate change levy and supplies subject to carbon price support rates, and we are reflecting upon the Government’s approach in this regard. I detect from his comments that he sympathises with the MEPs who voted down reforms to the scheme. I will go on with my comments as, regardless of the merits or non-merits of this approach to reducing carbon emissions, there is still the question of the Government’s intended direction for this policy, which is the purpose of our probing amendment today. 

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Ben Gummer (Ipswich) (Con):  The hon. Lady is wrong about my hon. Friend. He was making a philosophical point and was not in any way allying himself with the position of Conservatives in the European Parliament. Before she starts making assumptions about the knowledge of the ETS on the Government Benches, I should point out that we are in this mess because of the dilatory approach that the former Secretary of State for Energy and Climate Change—her leader—took to the negotiations on the second round of carbon credits at the end of the previous Administration. It meant that there was a surplus of credits in the market and the scheme collapsed as a result. 

Catherine McKinnell:  The hon. Gentleman’s comments lead on nicely to the point I was going on to make, which relates to that vote in the European Parliament. That was vital because the price of carbon had previously crashed due to the surplus of permits on the market. The reforms that were voted on, known as back-loading—strongly supported by the Government—would have propped up the price of carbon in the ETS market by delaying the auction of new emission permits. However, the vote was close enough that the actions of those Tory MEPs and one Liberal Democrat MEP made sure that the reforms did not pass. As a result, the price of carbon has continued to collapse and the EU’s credibility on climate policy has been damaged. 

3.15 pm 

I will quote from what the current Energy Secretary said about the EU’s emissions trading scheme before the vote: 

“The current low carbon price, caused by the large over-supply of allowances in the market, risks damaging growth and investment in green technologies. Removing some of these allowances over the next few years would help to restore confidence in the market, before longer-term reforms to strengthen the system can be brought in. An agreement on this now would minimise uncertainty in the market. 

Any delay could lead to greater costs in the long-term in meeting the EU’s 2050 objectives and would undermine the move to a low-carbon economy. If back-loading and structural reform are not supported, Member States may adopt unilateral policies to deliver their energy and climate objectives and stimulate investment, creating a complex patchwork of climate legislation across the EU that is inefficient and increases regulatory burdens on industry. 

The EU Emissions Trading System…is a cornerstone of climate change policy, which is helping the UK meet its climate change goals and ensures that emission reductions in energy intensive industries are achieved at the lowest cost”. 

Those events have had a significant impact on the measures we are debating, because the UK’s carbon price support was supposed to operate in conjunction with the emissions trading scheme to make sure the price of carbon never went below an agreed floor, with the CPS rate set as the difference between the target carbon price and the EU emissions trading scheme carbon price. 

The Government have set out the rates up to 2016 in the clause. I think the Minister will agree that they are significantly higher than many in the industry were expecting, with the result that the rate is rising so far at around 100% a year. The Government may seek to justify the rise in carbon floor prices on the basis that they are compensating for the emissions trading scheme’s continued collapse. However, there are several concerns

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about the possible consequences of the rise, especially when set against the background of all the problems with the EU emissions trading scheme; that is why our amendment asks the Government to commit to a conducting a review of the impact of the measures. 

The first concern is that, with the collapse of the EU emissions trading scheme and the rise of the carbon price floor in the UK, the differential between what the UK pays in carbon taxes and what the rest of the EU will be paying will grow ever wider. Not only could that make our economy less competitive; it could also lead to more companies taking the decision to build new generation plants outside the UK and sell us energy via an interconnector to avoid the carbon floor price, rather than building new plants in the UK. The second concern is that the hike in the carbon floor price will lead to higher household bills as companies simply pass the tax on to consumers. 

Those concerns are significant. It would be helpful if the Minister could reassure businesses and consumers by answering some of our questions as well as committing to keeping the impact of the measures under review. First, will the Minister explain why the rates have been rising so rapidly from what was initially announced by the Government? What assessment has he made of the cumulative impact of the collapse of the EU emissions trading scheme and the measures in the clause on the commitment to reducing carbon emissions? 

The policy objective for the measures states that the carbon price floor 

“is designed to provide an incentive to invest in low-carbon power generation”, 

and the summary of impacts notes: 

“In Great Britain, these measures are not expected to have any significant economic impacts.” 

Ben Gummer:  Will the hon. Lady reflect on my point that the reason we are in this mess is partly because of the failure of her party leader to do what he should have done when he was Secretary of State for Energy and Climate Change? I also want to flesh out the Opposition’s position on this matter: do they wish to see a lower carbon floor, or the same one, or a higher one, or a new negotiation—what precisely are they looking for? 

Catherine McKinnell:  I understand the hon. Gentleman’s desire for me to reflect on the past, but our focus is very much on the future. His party is in power and has the power to make a difference to not only this country’s carbon emissions, but the price of energy for ordinary consumers. That is why I am proposing our amendment today, which calls on the Government to keep such issues under review. I understand that the hon. Gentleman wants to flesh out and probe Opposition policy, but that is not in the scope of the amendment or our discussions today. 

Ben Gummer:  The hon. Lady rightly said that the ETS is one of the pillars of the carbon regime that the Europe Union is using to fight climate change. If that is the case, what is the Opposition’s policy on the price that the carbon floor should attract? 

Catherine McKinnell:  When I said that the ETS is a cornerstone of combating climate change, I was actually quoting a Minister in the hon. Gentleman’s Government.

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My comments are focused on what this Government are doing to take on some of the serious challenges posed. 

Given the concerns that I have touched on, I am sure that members of the Committee and members of the public would like to know what assessment the Minister has made of the cumulative impact of the collapse of the EU ETS and the level of rates in the measure on the UK’s competitiveness in this sector, on the prospect of investment and on jobs and growth, which must be key focuses for the Government. What assessment has he made of the cumulative impact of the collapse of the EU ETS and the measures in the clause on household bills in the UK? Will the Minister remind us how much the Exchequer is expected to receive in revenue as a result of the carbon price support rates? What consideration has been given to the growing calls for revenue from carbon taxes to be used to fund energy efficiency drives? 

Earlier, I read out the Energy Secretary’s statement on the EU ETS. After the vote by his colleagues in the European Parliament, he published a joint statement with eight other European Ministers calling on the Council and Parliament to 

“take the urgent steps necessary, working constructively together, to come to a swift resolution of the backloading proposal by July of this year at the latest”. 

Can the Minister confirm that it is still Government policy for the carbon price support to operate in conjunction with the EU ETS? If so, will the Minister update us on what the Government are doing to get the EU ETS back on track, and what conversations he or other Ministers have had with those Conservative MEPs who voted against the necessary reform of the scheme to ensure that it does, in fact, have a future? 

In the policy objective for this clause, the Government state that the carbon price floor is designed to provide 

“greater support and certainty to the carbon price in the UK’s electricity generation sector.” 

What impact have such measures, alongside events in the European Parliament in April, had on confidence and certainty in the industry? 

John Pugh:  The hon. Lady normally suggests that she asks the Government to do simple things. In this case, she is asking the Government to do something awfully difficult, namely to produce within one year an assessment of the cumulative impact of the EU emissions trading scheme, which is identified as extremely volatile and changeable. I think I was in a Committee room such as this when David Miliband was the Environment Secretary and he was discussing the scheme’s prospects. Since then, it has changed rapidly, has gone through various incarnations and continues to change. In 2012, the European Commission called for further major changes. How can the Government possibly comply with what might on the face of it seem a simple request given her analysis of the scheme on which she wants to know the Government’s policies’ impact? 

Catherine McKinnell:  If the hon. Gentleman reads our amendment, he will see that it calls for the Chancellor to make a report to Parliament on the cumulative impact of the carbon price support rates and changes to the EU emissions trading scheme on the Government’s commitment to reducing carbon emissions and on jobs

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and growth. That obviously has to relate to recent events that will impact on jobs and growth, and the Government’s commitment to reducing carbon emissions over the next 12 months. 

The Government should not underestimate the important impact of recent events concerning the EU emissions trading scheme on confidence in the market, and confidence to invest in the UK. They should also keep under review what impact that has over the next few months and see whether investment decisions are made that are detrimental to the UK and whether household bills go up as a result of additional taxes being passed on to the consumer. 

I appreciate the concern that the hon. Gentleman expresses for the Government and their capacity to do this. I think that ultimately taxpayers will want to know the consequences that recent events at the EU Parliament will have on the ability to move back into economic growth on a sustainable basis to which we are all committed. The Government state they are very much committed to being the greenest Government ever. Let us see that put under review, using the Government’s great resources to take stock of where we are and what changes should be made to put us in a better position. 

Sajid Javid:  Clause 198 introduces schedule 40, which consolidates all the primary legislation needed to introduce the UK’s carbon price floor. By way of background, at Budget 2011 we announced the introduction of a carbon price floor from 1 April 2013. The Finance Acts of 2011 and 2012 included the initial primary legislation. 

The price floor is an important first step in our electricity market reforms. It will provide an early and credible signal to incentivise investment in our ageing electricity infrastructure. For solid fuels, gas and liquefied petroleum gas, the carbon price floor is achieved by charging carbon price support rates of climate change levy on those fuels when used to generate electricity. For oils used to generate electricity, the carbon price floor is achieved by reducing the amount of fuel duty that is reclaimable on the oil by the carbon price support rates of fuel duty. 

Allow me to set out what the schedule does. It consolidates previous legislation into a single schedule, to ensure it is simple to understand, and it also makes a number of changes to previous legislation. First, it sets the carbon price support rates for 2015-16, which are equivalent to £18.08 per tonne of carbon dioxide. Setting those rates two years in advance is in line with our previous commitment and provides certainty for investors by ensuring the carbon price is in line with the trajectory set out at Budget 2011. 

Secondly, it introduces an exemption for electricity generators based in Northern Ireland. That recognises the unique nature of the electricity market in Northern Ireland, which is a joint market with the Republic of Ireland. The exemption will help to support the Northern Irish economy and protect energy security in the region. It will also ensure that carbon emissions in Northern Ireland and the Republic do not increase as a result of the interaction between the carbon price floor and the electricity market there. Finally, it makes a number of technical changes to the administration of the carbon price floor to make the tax fairer and to reduce burdens for those complying with the tax. 

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At Budget 2013 we announced that energy-intensive industries will continue to receive support in 2015-16, to compensate for the indirect costs of the carbon price floor. That recognises the impact of the CPF on the competitiveness of the UK’s energy-intensive industries and the importance of the industries in supporting the growth of the UK economy. 

The CPF is a key commitment for the UK Government in signalling necessary investment in low-carbon electricity generation. Supporting the carbon price will marginally increase the cost of generating electricity, but over the long term the UK stands to benefit from cleaner, cheaper and more reliable sources of low-carbon energy. 

3.30 pm 

Amendment 148 would commit the Government to publishing a report on the impact of the carbon price floor and changes to the European Union emissions trading scheme—ETS—within a year of the Bill’s enactment. The Government continually monitor the impact of policies, and all tax policies are kept under review. An impact assessment on the carbon price floor policy was included in the consultation in December 2010, and the Government have continued to publish tax impact and information notes when changes to the policy have been announced. Five such notes have now been published. The Government will continue to update Parliament on the progress of discussions in Europe on the EU ETS in the usual way. When proposals affect United Kingdom legislation, the Government will consult on the changes, including through making assessments of the impact. 

Each year, the Government publish updated projections of future energy use and greenhouse gas emissions in the UK, which take account of the impact of policies such as the carbon price floor and the EU emissions trading system, and allow us to monitor progress towards an emissions reduction target. Certainty in such policies is critical for driving investment and low-carbon electricity generation in the UK. The Government have set out a trajectory for the carbon price floor up to 2013 to provide the necessary certainty. The amendment is therefore unnecessary and would lead to the duplication of work that is done already in the usual course of policy maintenance, so I ask the hon. Member for Newcastle upon Tyne North to withdraw it. 

Let me respond to some the questions that the hon. Lady asked. She referred to the impact on UK competitiveness and industry. In 2013, the carbon price floor will add about 2% to the average business electricity bill. In 2011, purchases of energy and water accounted for less than 3% of the total cost of UK manufacturing. In our 2011 autumn statement, we announced a package worth £250 million over the spending review for energy-intensives, and the Budget announced that those policies will continue to 2015-16. 

The hon. Lady asked about the impact on households. In 2013, the price floor will add about 1%, or £6, to the average household annual electricity bill. Households in the UK pay the third lowest electricity prices in the EU 15. The UK currently has the lowest rate of VAT on residential energy of all the EU 15, and the total amount paid towards VAT and the cost of energy and climate change policies per unit of residential electricity is among the lowest in the EU 15. 

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The hon. Lady also asked how the recent fall in the ETS might affect the carbon price support rates for 2013-14 and 2014-15. The recent fall in the ETS rates does not affect those carbon price support rates, so UK industry will benefit from the fall in price in line with its European competitors. As a result of the fall in ETS carbon prices, the Government will collect less—not more—revenue from the ETS carbon price floor. As for the ongoing discussions in the EU on the Commission’s back-loading proposals to which she referred, the UK supports the strengthening of the EU ETS and is engaging with the proposals. The carbon price floor rates for 2013-14, 2014-15 and 2015-16 have been announced and are covered by the Bill, and changes in the carbon price as a result of the decision on back-loading will be taken into consideration when setting the price support rates for 2016-17 and beyond. 

I thank my hon. Friends the Members for Penrith and The Border, for Ipswich and for Southport for their contributions. The Government remain committed to supporting the UK carbon price in a cost-effective way so that we have clean, secure supplies of electricity that help to support growth. I therefore hope that the Committee will agree to the clause and schedule. 

Catherine McKinnell:  I thank the Minister for at least responding to the main worries that have been raised. He reassured us that the Government will keep matters constantly under review and are committed to an ETS that works and produces the economic certainty that is needed to ensure that we have sustainability and the greenest Government ever, so I beg to ask leave to withdraw the amendment. 

Amendment, by leave, withdrawn.  

Clause 198 ordered to stand part of the Bill.  

Schedule 40 agreed to.  

Clause 199 

Contracts that are not taxable 

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

Catherine McKinnell:  As is the case with several other clauses, clause 199 results from the introduction of the personal independence payment and the armed forces independence payment from April 2013 as a replacement for the disability living allowance. 

Committee members may be aware that the insurance premium tax is a tax on general insurance premiums that is payable by anyone receiving taxable insurance premiums as an insurer, or indeed anyone intending to receive such premiums. However, insurers do not have to charge insurance premium tax on contracts of insurance in relation to motor vehicles that, subject to various conditions being satisfied, are used by or intended for use by a “handicapped person”—the words in the explanatory notes seem to be extremely insensitive—who is in receipt of a specified benefit. I hope that the Minister takes note of the language used in the explanatory notes. 

Although the tax information and impact note suggested that the measure would be dealt with via secondary legislation, clause 199 amends paragraph 3 of schedule 7A

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to the Finance Act 1994 to extend the list of specified benefits to include the new personal independence payment and the armed forces independence payment. The tax information and impact note states that the changes in the Bill are being made 

“so that new and continuing recipients of these benefits and claimants of the tax reliefs and supports are both eligible for the same reliefs and supports”. 

However, we also know from the note that 

“it is expected that as part of the overall changes to the welfare system, approximately 500,000 disabled individuals”— 

that is better terminology— 

“will no longer receive either DLA or PIP”. 

Does the Minister know how many of the 500,000 people who are expected to be taken off disability allowances have motor vehicle insurance that is currently outside insurance premium tax? What impact will the measure have on the cost of motor vehicle insurance for those 500,000 people, or a proportion thereof, who are expected no longer to receive either DLA or PIP, and who will therefore suffer a detrimental impact? 

Sajid Javid:  Clause 199 makes changes to insurance premium tax legislation. It adds references to two new benefits that are being introduced as part of the welfare reforms to ensure that people who are eligible to claim either of those benefits can continue to benefit from an existing IPT relief from 8 April 2013. 

The Department for Work and Pensions is reforming the welfare benefits system by bringing in the new universal credit system. As part of its reforms, the Department is partially replacing the current disability living allowance with the new personal independence payment benefit. The Ministry of Defence is introducing the new armed forces independence payment benefit for armed forces personnel who have been injured in action since 2006. The new AFIP benefit begins on 8 April 2013, while the PIP will gradually be phased in over a number of years, with people becoming eligible from 8 April 2013. 

Existing legislation allows an IPT relief on insurance premiums covering motor vehicles leased by qualifying disabled persons. That legislation needs to be amended to include references to the new benefits so that all eligible people can begin or continue to claim the IPT relief. The changes made by clause 199 mean that the IPT relief can continue to be claimed by eligible persons. 

Andy McDonald (Middlesbrough) (Lab):  My hon. Friend the Member for Newcastle upon Tyne North talked about the terminology in the Bill. I am a little surprised to see the words “handicapped persons”; I thought we had moved on from that. Will the Minister undertake to review the terminology to determine whether the provision can be put into more acceptable language? 

Sajid Javid:  If the hon. Gentleman bears with me, I usually come to questions towards the end of my contribution. He is right to raise that point, and I will address it in a moment. 

The changes made by clause 199 will mean that the IPT relief can continue to be claimed by eligible persons. The measure is expected to have a negligible impact on the Exchequer and will not have any significant economic impact. 

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The hon. Member for Newcastle upon Tyne North asked about the use of the word “handicapped” in the explanatory notes. I share her concerns; I noticed that word the first time I read the notes. However, that particular word has always been used in IPT legislation, for example in paragraph 3 of schedule 7A to the Finance Act 1994. We have moved away from using such language, and, as the hon. Lady rightly said, “disabled person” would be much more appropriate. I will take that issue away and see whether we can do anything about it. Even though the term is in historical legislation, we should concern ourselves about something that is so important. I therefore respect the point raised by the hon. Lady and the hon. Member for Middlesbrough. 

3.41 pm 

Sitting suspended for a Division in the House.  

4 pm 

O n resuming—  

Sajid Javid:  I was about to come to an end. I had to deal with one final question from the hon. Member for Newcastle upon Tyne North. Of the 500,000 likely to lose out, how many have been taken out? The intention of the measure is to ensure that those entitled to claim PIP and AFIP can retain access to IPT relief. Any reduced entitlement is a consequence of the DWP reforms, which mean that fewer people are qualified for PIP than for DLA at present. We do not have the numbers for IPT specifically, but by 2018 under PIP, 230,000 people will receive the same or higher award, with 150,000 receiving more money than under the DLA system. 

Question put and agreed to.  

Clause 199 accordingly ordered to stand part of the Bill. 

Clause 213 

Trusts with vulnerable beneficiary 

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

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 110 to 124. 

That schedule 42 be the Forty-second schedule to the Bill. 

Sajid Javid:  Clause 213 and schedule 42 update the tax code for trusts with vulnerable beneficiaries in two main ways. First, they ensure that the special look-through tax treatment for such trusts remains properly targeted as DLA is replaced by the new PIP. Secondly, they simplify the rules more generally by aligning conditions on how trustees can use the income and capital of the trust. 

By way of background, trusts can be a sensible way to provide financial support for a vulnerable person, in particular for someone unable to manage money. Beneficial tax treatment is given to such vulnerable beneficiary trusts under which, in essence, the tax liabilities are calculated as though they had arisen on the beneficiary rather than on the trustees. 

Under long-standing rules, trusts qualifying for that treatment have included those set up for certain disabled persons: those who cannot manage their affairs because

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of a mental disorder; those in receipt of attendance allowance; and those in receipt of the higher or middle rate care component of DLA. From 8 April 2013, however, the new PIP began to replace DLA for those of working age—those aged from 16 to 64—and so a new definition is required. 

The provisions introduced by clause 213 and schedule 42 are designed to ensure that the special tax rules for those trusts remain properly targeted. Schedule 42 will extend eligibility to those trusts where the beneficiary receives the new PIP by virtue of entitlement to the daily living component at either the standard or the enhanced rate. We are also giving access where the beneficiary receives the AFIP or constant attendance allowance instead of one of the other qualifying welfare benefits. That will ensure that eligibility remains objective and straightforward in most cases and that, as far as possible, welfare reform changes do not limit which trusts can qualify. 

Schedule 42 also changes the conditions that limit how the trust income and capital can be applied. Those conditions currently vary across taxes. In some cases, the trustees’ discretionary powers are restricted so that capital is applied for the benefit of the vulnerable person; in others, up to half the capital can be applied for the benefit of another person. That difference in approach can be confusing, and it defeats the purpose of having special rules for trusts with a vulnerable beneficiary if significant sums can be applied for the benefit of someone else. 

We have therefore decided that the rules should be harmonised so that the trust property is applied for the benefit of the vulnerable person. We have listened to what we were told about the need to have some flexibility, and we have decided that 3% of the trust fund, up to the maximum of £3,000, may be used each year for beneficiaries other than the vulnerable person. To ensure we can update that provision in the future, we have taken a power to amend the limit by Treasury order. We also recognise the potential impact of the changes on existing trusts and wills. We are therefore ensuring that the transitional rules being introduced avoid the need for existing trust deeds and wills to be rewritten. 

Let me turn briefly to Government amendments 110 to 124, which make detailed technical changes to ensure the legislation works as intended. Amendments 115, 117, 122 and 123 expand the definition of “disabled person” to include all those who obtain constant attendance allowance, including those who obtain it by way of an increase in disablement pension. 

Amendments 110 to 114 and 118 to 121 expand the definition of “disabled person” to include individuals who would be entitled to receive a qualifying welfare benefit were it not for their being in a publicly funded institution, such as a hospital, or abroad. 

Amendment 116 ensures that harmonisation of the way in which the trust income and capital can be used is comprehensive, by applying to interest-in-possession trusts in the inheritance tax code. 

Amendment 124 ensures that grandfathered rights under the commencement rules are preserved where a codicil to a will, or a new will, is made that continues provision that a qualifying vulnerable beneficiary trust be established. 

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In conclusion, the proposed changes are fair, they ensure that the special look-through tax treatment for such trusts remains properly targeted and they simplify the rules more generally. 

Catherine McKinnell:  As the Minister outlined, clause 213, like clauses 12, 70, 188 and 199, has been introduced in part following the introduction of the personal independence payment and the armed forces independence payment, which replace the disability living allowance. 

As Committee members will know, a vulnerable beneficiary trust is established for a beneficiary who is either a person with a disability or someone under 18 who has lost a parent through death. Special tax rules rightly exist for the trustees of qualifying vulnerable beneficiary trusts, enabling them to claim relief on income tax, capital gains tax and, in some cases, inheritance tax. 

However, as the Minister explained, the existing definition of “vulnerable beneficiary” for tax purposes relies in part on whether the beneficiary is in receipt of the higher or middle rate of the care component of the DLA. Therefore, following consultation, the clause introduces schedule 24 to amend the definition of a disabled person to include those in receipt of PIP or AFIP. 

Clause 213 seeks to harmonise the capital and income rules. The tax information and impact note suggests that secondary legislation will, as the Minister outlined, confirm that the amount trustees will be able to apply without having to prove that it is for the vulnerable beneficiary’s benefit will be the lower of £3,000 or 3% of the trust fund each year. 

A number of concerns have been expressed about the measures, and I would be grateful if the Minister addressed them in his response. In particular, the Institute of Chartered Accountants in England and Wales is disappointed that the Government did not take the opportunity 

“for a complete review of the vulnerable beneficiary regime”. 

Will the Minister outline why the Government have chosen to take that rather limited approach, rather than the complete review for which many people, particularly tax specialists, have been calling? 

The Low Incomes Tax Reform Group has welcomed the Government’s decision not to limit the definition of “vulnerable beneficiary” to those in receipt of the enhanced rate of the daily living component of PIP, which was the initial proposal in the consultation, but to include anyone in receipt of the daily living component. The group has, however, expressed concern that the definition of “vulnerable beneficiary” has not been framed sufficiently widely to cover all those who need protection: 

“Nobody who could benefit from such a trust should be barred from doing so by any inadequacy in the legal definition. In particular, all who are at risk of any form of abuse, exploitation, coercion or persuasion if left to manage their own property should be entitled to the protection a trust can give without suffering a tax disadvantage, and should be capable of being embraced within the definition of ‘vulnerable beneficiary’.” 

With that in mind, the LITRG’s response to the Government consultation proposed a three-step approach to defining “vulnerable beneficiary” or “disabled beneficiary.” 

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I appreciate that the Government’s amendments go some way towards meeting those concerns by making it clear that the definition of “disabled person” includes all those who claim constant attendance allowance or who would be entitled to receive qualifying welfare benefit if they were not in a publicly funded institution or abroad. The Government have obviously declined to take up the LITRG’s three-step proposal, and I would be grateful if the Minister outlined why. 

Clause 213 allows trustees to apply small amounts of income and capital, up to the suggested limit of £3,000 a year, without having to prove that it is for the benefit of the vulnerable beneficiary. The LITRG says: 

“It is entirely reasonable that…there should be a limit on the extent to which trust capital and income can be used for the benefit of anyone other than the disabled or vulnerable beneficiary. However, the limit proposed…is too inflexible. If, for example, the trustees saw fit to provide necessary accommodation or a break to a carer, they would be unable to do that without breaching the vulnerable trust status. In short, they would be fettered from acting in what they saw as the best interests of the beneficiary by the very rules that seek to protect the interests of that beneficiary.” 

The group goes on to say: 

“We note that the limit will be set by secondary legislation which we trust HMRC will keep under close review and be prepared to change if the evidence does…show that it should be increased.” 

Will the Minister explain the thinking behind the £3,000 and 3% limits? Will he commit to ensuring that HMRC keeps the measure under close review, changing it if it proves contrary to the aims of these tax rules? 

Finally, echoing the ICAEW’s concerns, the LITRG has also expressed disappointment that 

“a golden opportunity to make more extensive alignments and simplifications to the vulnerable trust regime has been missed.” 

Given that that is the remit of the Office of Tax Simplification, the LITRG hopes that the OTS 

“may one day get to grips with these complexities and anomalies.” 

Will the Minister clarify whether the OTS is indeed looking at or intending to look at that complex area? What proposals are there to do so if that is not already on the agenda? 

Sajid Javid:  I thank the hon. Lady for her questions. First, she asked why there is not a wider review of the tax rules in this area. The Government’s priority has been to ensure that the special tax treatment of vulnerable beneficiary trusts remains properly targeted after DLA started to be phased out for those of working age from April 2013. We believe the changes ensure that those who receive the daily living component of the new PIP on either the standard rate or the enhanced rate will continue to benefit. 

We think the changes strike the right balance between simplification and acting quickly, and they also ensure that we take the opportunity to harmonise how trustees across the different types of vulnerable beneficiary trusts can use the trust income capital, thereby making it simpler to comply with the rules. I assure the hon. Lady that we will keep that and other aspects of the regime under review. We are more than happy to have further discussions with stakeholders on potential future changes and on how they can be practically achieved. 

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4.15 pm 

The hon. Lady also asked how many people would be affected by the policy. Our assessment shows that, including all those who claim the daily living component of PIP, broadly the same number of people can potentially qualify. We anticipate that those most in need of a trust will continue to qualify in the same way as before. If a person does not qualify for the daily living component of the PIP, they may still be able to qualify if they meet one of the other definitions, such as being incapable of managing their own affairs—if they have a mental disorder, for example. 

The Government amendments, as the hon. Lady noted, will expand the definition of “vulnerable person” to include those claiming the armed forces independence payment or the constant attendance allowance. 

The hon. Lady also asked about the £3,000 or 3% limit. We have put that in place because allowing amounts to be applied to non-vulnerable beneficiaries is justified where there is a consequential benefit to the vulnerable beneficiary. I think we all agree that where there is no benefit to a vulnerable person, allowing such a payment would defeat the whole purpose of having special rules for vulnerable beneficiary trusts and reduce the funds available for the vulnerable beneficiary. 

In our discussions with the Society of Trust and Estate Practitioners, an interested party, it said that it is not always clear whether the payment is for the benefit of a vulnerable beneficiary or another individual—to pay for their carer to have a much-needed break, for example—and that there is a need for some flexibility and reform. We received similar feedback from the Low Incomes Tax Reform Group and the Chartered Institute of Taxation. 

The 3% restriction is designed to stop relatively large amounts of smaller funds—trusts with funds below £100,000—being paid to non-vulnerable beneficiaries. We think that the £3,000 limit strikes the right balance between the flexibility required and fairness. It will enable small amounts to be spent by trustees without concern that they benefit someone other than the vulnerable beneficiary. 

I confirm to the hon. Lady that we will keep that under close review. Having the power to change the limit by order will provide flexibility in the future. We are keen to ensure that the limit is always fair and sensible, and that it works to the advantage of the people whom the trust arrangement is trying to help. 

Question put and agreed to.  

Clause 213 accordingly ordered to stand part of the Bill.  

Schedule 42 

Trusts with vulnerable beneficiary 

Amendments made: 110, in schedule 42, page 486, line 27, leave out ‘or payment’ and insert ‘, payment or increased pension’. 

Amendment 111, in schedule 42, page 486, line 31, after ‘72(8)’ insert ‘, 104(3)’. 

Amendment 112, in schedule 42, page 486, line 32, after ‘72(8)’ insert ‘, 104(3)’. 

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Amendment 113, in schedule 42, page 486, line 37, leave out ‘or payment’ and insert ‘, payment or increased pension’. 

Amendment 114, in schedule 42, page 486, line 42, at end insert— 

(iv) articles 61 and 64 of the Personal Injuries (Civilians) Scheme 1983 (S.I. 1983/686),

(v) article 53 of the Naval, Military and Air Forces etc. (Disablement and Death) Service Pensions Order 2006 (S.I. 2006/606), and

(vi) article 42 of the Armed Forces and Reserve Forces (Compensation Scheme) Order 2011 (S.I. 2011/517).’.

Amendment 115, in schedule 42, page 487, line 44, at end insert— 

‘(7) In the heading, for the words following “person” substitute “expected to fall within the definition of ‘disabled person’.

Amendment 116, in schedule 42, page 488, line 14, at end insert— 

9A (1) In section 89B (meaning of “disabled person’s interest”), in subsection (1)(c) after “2006” insert “if the trusts on which the settled property is held secure that, if any of the settled property is applied during the disabled person’s life for the benefit of a beneficiary, it is applied for the benefit of the disabled person”.

(2) After that section insert—

“89C Disabled person’s interest: powers of advancement etc

(1) The trusts on which settled property is held are not to be treated for the purposes of section 89B(1)(c) or (d) (meaning of “disabled person’s interest”: cases involving an interest in possession) as failing to secure that the settled property is applied for the benefit of a beneficiary by reason only of—

(a) the trustees’ having powers that enable them to apply otherwise than for the benefit of the beneficiary amounts (whether consisting of income or capital, or both) not exceeding the annual limit,

(b) the trustees’ having the powers conferred by section 32 of the Trustee Act 1925 (powers of advancement),

(c) the trustees’ having those powers but free from, or subject to a less restrictive limitation than, the limitation imposed by proviso (a) of subsection (1) of that section,

(d) the trustees’ having the powers conferred by section 33 of the Trustee Act (Northern Ireland) 1958 (corresponding provision for Northern Ireland),

(e) the trustees’ having those powers but free from, or subject to a less restrictive limitation than, the limitation imposed by subsection (1)(a) of that section, or

(f) the trustees’ having powers to the like effect as the powers mentioned in any of paragraphs (b) to (e).

(2) For the purposes of this section, the “annual limit” is whichever is the lower of the following amounts—

(a) £3,000, and

(b) 3% of the amount that is the maximum value of the settled property during the period in question.

(3) For those purposes the annual limit applies in relation to each period of 12 months that begins on 6 April.

(4) The Treasury may by order made by statutory instrument—

(a) specify circumstances in which subsection (1)(a) is, or is not, to apply in relation to a trust, and

(b) amend the definition of “the annual limit” in subsection (2).

(5) An order under subsection (4) may—

(a) make different provision for different cases, and

(b) contain transitional and saving provision.

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(6) A statutory instrument containing an order under subsection (4) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, the House of Commons.”

(3) The amendments made by this paragraph have effect in relation to property transferred into settlement on or after the day on which this Act is passed.

(4) Nothing in this paragraph is to be read as preventing property transferred into a settlement to which sub-paragraph (5) applies from being settled property for the purposes of section 89B(1)(c) or (d) of IHTA 1984.

(5) This sub-paragraph applies to a settlement—

(a) created before the day on which this Act is passed the trusts of which have not been altered on or after that day, or

(b) arising on or after the day on which this Act is passed under the will of a testator, if—

(i) the will was executed before the day on which this Act is passed and its provisions, so far as relating to the settlement, have not been altered on or after that day, or

(ii) the will was executed or confirmed on or after the day on which this Act is passed and its provisions, so far as relating to the settlement, are in the same terms as those contained in a will executed by the same testator before that day.’.

Amendment 117, in schedule 42, page 493, line 24, at end insert— 

(da) a person in receipt of an increased disablement pension,’.

Amendment 118, in schedule 42, page 493, line 30, leave out from ‘that’ to end of line 36 and insert ‘he or she would be entitled to receive attendance allowance but for— 

( ) the conditions as to residence and presence prescribed under section 64(1) of SSCBA 1992 or section 64(1) of SSCB(NI)A 1992,’.

Amendment 119, in schedule 42, page 494, line 5, leave out from ‘that’ to end of line 12 and insert 

‘he or she would be entitled to receive a disability living allowance by virtue of entitlement to the care component at the highest or middle rate but for— 

( ) the conditions as to residence and presence prescribed under section 71(6) of SSCBA 1992 or section 71(6) of SSCB(NI)A 1992,’.

Amendment 120, in schedule 42, page 494, line 24, leave out from ‘that’ to end of line 32 and insert 

‘he or she would be entitled to receive personal independence payment by virtue of entitlement to the daily living component but for— 

( ) the conditions as to residence and presence prescribed under section 77(3) of WRA 2012 or the corresponding provision having effect in Northern Ireland,’.

Amendment 121, in schedule 42, page 494, line 43, at end insert— 

‘Increased disablement pension

7A A person is to be treated as a disabled person under paragraph 1(da) if he or she satisfies HMRC that he or she would be entitled to receive an increased disablement pension but for—

(a) conditions as to residence and presence that have effect in relation to increased disablement pension by virtue of regulations under section 104(3) of SSCBA 1992 or section 104(3) of SSCB(NI)A 1992 (application of attendance allowance provisions),

(b) provision made under section 67(1) or (2) of SSCBA 1992 or section 67(1) or (2) of SSCB(NI)A 1992 (non-satisfaction of conditions for attendance

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allowance where person is undergoing treatment for renal failure in hospital or is provided with certain accommodation) that has effect in relation to increased disablement pension by virtue of such regulations, or

(c) section 113(1) of SSCBA 1992 or section 113(1) of SSCB(NI)A 1992 or provision made by regulations under section 113(2) of SSCBA 1992 or section 113(2) of SSCB(NI)A 1992 (general provisions as to disqualification and suspension).

Constant attendance allowance

7B A person is to be treated as a disabled person under paragraph 1(e) if he or she satisfies HMRC that he or she would be entitled to receive constant attendance allowance but for—

(a) article 61 (residence outside United Kingdom) or article 64 (maintenance in hospital or institution) of the Personal Injuries (Civilians) Scheme 1983 (S.I. 1983/ 686), or

(b) article 53 (maintenance in hospital or institution) of the Naval, Military and Air Forces etc. (Disablement and Death) Service Pensions Order 2006 (S.I. 2006/ 606).

Armed forces independence payment

7C A person is to be treated as a disabled person under paragraph 1(f) if he or she satisfies HMRC that he or she would be entitled to receive armed forces independence payment but for article 42 of the Armed Forces and Reserve Forces (Compensation Scheme) Order 2011 (S.I. 2011/517) (cessation of payment on admission to Royal Hospital, Chelsea).’.

Amendment 122, in schedule 42, page 495, line 5, at end insert— 

(a) article 14 of the Personal Injuries (Civilians) Scheme 1983 (S.I. 1983/686), or

(b) ’.

Amendment 123, in schedule 42, page 495, line 12, at end insert— 

‘“increased disablement pension” means an increase of disablement pension under—

(a) section 104 of SSCBA 1992, or

(b) section 104 of SSCB(NI)A 1992,’.

Amendment 124, in schedule 42, page 495, line 27, leave out from ‘arising’ to end of line 28 and insert 

‘on or after 8 April 2013 under the will of a testator, if—

(i) the will was executed before 8 April 2013 and its provisions, so far as relating to the settlement, have not been altered on or after that date, or

(ii) the will was executed or confirmed on or after 8 April 2013 and its provisions, so far as relating to the settlement, are in the same terms as those contained in a will executed by the same testator before that date.

‘(2) In this Schedule a reference to a will includes a reference to a codicil.’.—(Sajid Javid.)

Schedule 42, as amended, agreed to.  

Clause 214 

Unauthorised unit trusts 

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

Catherine McKinnell:  The clause will provide the Treasury with a power to introduce regulations on the tax treatment of trustees or unit holders of unauthorised unit trusts at a future date, with effect from Royal

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Assent of the Bill. Its aim is to counteract their use for avoidance purposes, which is an aim that the Opposition support. 

The tax information and impact note suggests that the provision is intended to help close a tax gap, which is welcome. However, it also suggests that the measure will have a negligible impact on the Exchequer. Given the limited information set out in the note about the tax avoidance aspect of the measure, will the Minister outline how widespread the problem that the measure is intended to deal with is? That would be helpful to the Committee. How much tax does he estimate has been lost or avoided through the use of unauthorised unit trusts? Given that they are expected to have a negligible impact, it would be interesting to see what those calculations have been. In view of HMRC’s low estimate of the tax gap, which currently stands at £32 billion, and given that the tax information and impact note states that this measure will help to reduce it, could the Minister tell us by how much? I appreciate that these measures will be introduced via secondary legislation, given the fast moving nature of collective investment funds. As the use of regulations allow for the changes to be made more quickly, could the Minister give us an estimate of the time scales for the introduction of these measures? 

Mr Gauke:  Clause 214 will enable us to introduce new tax rules for unauthorised unit trusts and their investors. UUTs are pooled investment vehicles. Most UUTs are used solely by exempt investors such as pension funds that are not required to pay tax on any gains they realise. However some have been used by non-exempt investors in abusive avoidance schemes. We therefore announced in our paper “Tackling tax avoidance” at Budget 2011 that UUTs would be included in the review of high-risk areas in the tax code. At the same time, the Government committed to simplify the rules and reduce administrative burdens for exempt investors. The changes made by the clause provide the Treasury with the power to set out the tax rules and administrative machinery for UUTs and their investors in regulations. This is consistent with the approach used for other forms of collective investment vehicle, the principal benefit being the ability to respond quickly to commercial or regulatory change. 

The clause provides a power to make further changes through regulations. These proposed changes have been subject to full consultation, initially on broad options in June 2011 and on detailed proposals in May 2012. A summary of responses, a draft Finance Bill clause and draft regulations were published for comment in December 2012. The changes were broadly welcomed by the industry, but, where appropriate, amendments were made in response to concerns about some of the proposals. Those principally concerned sanctions that might apply in the case of minor and inadvertent breaches of the rules and ensuring that investment in UUTs remained tax efficient for pension funds and other exempt investors. 

The first regulations provided for by the clause will be subject to the affirmative procedure and are expected to be introduced after the summer recess. A draft of regulations has been published for further comment and is available to the Committee. I have set out the process of consultation that we have undertaken. The question of why it has taken so long to address this matter of tax avoidance has been raised. It is worth pointing out that the Government acted immediately in 2010 to close down

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an abusive avoidance scheme that was disclosed to HMRC. However, reform is still necessary to simplify rules that have become increasingly complex. That will help to protect against future abuse. The Government have consulted and officials have been working with industry to make sure that any changes do not adversely affect exempt investors such as pension funds. 

The hon. Lady asked how much tax would be safeguarded by this measure. It is correct to say that there is no scorecard figure for revenue protection, as avoidance schemes tend by their nature to be novel and do not always work as intended. However, previous schemes that have sought to exploit the UUT rules involve tax risk in the hundreds of millions. The measures introduced in regulations will simplify and make fundamental changes to the rules that will remove opportunities for avoidance. 

The hon. Member for Newcastle upon Tyne North raised the issue of the tax gap. The approach that the Government have taken on the tax gap calculation is consistent with that of the previous Government. The numbers are looked at carefully. I remember the right hon. Member for East Ham (Stephen Timms) when he was Financial Secretary in the previous Government defending the methodology for that tax gap calculation. There have been no changes. I am sure that the hon. Lady is aware of some of the weaknesses in the methodology used in one of the more prominent alternative calculations. 

Catherine McKinnell:  The Minister has misinterpreted my query. I was not questioning HMRC’s method of calculating the tax gap, but pointing out that others would deem it a conservative estimate. There are many other areas of tax avoidance that, by common agreement, should be addressed. The G8 meeting under way now is looking at some of those issues. We should always bear in mind when talking of the official tax gap that it is a conservative estimate. Other revenue is potentially there that members of the public would like to see collected. They would like the necessary changes to be made to do that. 

Mr Gauke:  I am tempted to go quite a long way down that road because there are a number of issues there. There are different definitions of tax avoidance. Some behaviour that is consistent with the law may still be considered by some to be unacceptable and be included in that calculation. I strongly defend the HMRC assessment as a proper tax gap, but there are of course policy choices for Governments to address some of those points. 

This particular provision protects revenue and is an important part of what we are doing to address tax avoidance, along with a large number of other measures, including support for HMRC. The G8 meeting in Lough Erne, now completed, has demonstrated further progress in dealing with tax avoidance and evasion. I am pleased with that further progress today. 

The clause supports the Government’s objective of closing the tax gap. It will also enable simplification of a complex part of the tax code and reduce burdens for business and exempt investors. I hope that it can stand part of the Bill. 

Question put and agreed to.  

Clause 214 accordingly ordered to stand part of the Bill.  

Column number: 617 

Clause 215 

Statutory residence test 

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

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 125 to 135. 

That schedule 43 be the Forty-third schedule to the Bill. 

Mr Gauke:  Clause 215 introduces schedule 43, which provides a statutory residence test for individuals. That new test will provide greater clarity and certainty for individuals when determining their resident status for tax purposes in the UK. 

Until now, there has been no formal statutory definition of tax residence. There is very little relevant legislation, so the definition has largely rested on legal cases decided in the courts over a long period of time. Many of the cases were very old and did not reflect modern technology and travel patterns, which have changed the way people live their lives. The result is that the previous residence rules were vague and complicated. Knowing a person’s tax residence is essential for determining their tax liability. Tax and professional bodies have long argued that this lack of certainty is unsustainable and unfair to the taxpayer. In Budget 2011, therefore, the Government announced that they would introduce a statutory definition of tax residence to provide greater certainty and clarity for people moving between countries. The test will replicate as far as possible the residence outcomes delivered by the current rules, but will provide greater certainty for the taxpayer. 

4.30 pm 

The test takes into consideration the days spent in the UK and connections to the UK. It is structured in three parts. First, the automatic overseas tests determine whether the individual is automatically non-resident; if so, that is conclusive. Secondly, for those not automatically non-resident, the automatic UK test determines whether an individual is automatically resident; if so, that is conclusive. Thirdly, for those whose position is not decided by one of the automatic tests, a sufficient ties test determines residence based on a combination of the amount of time spent in the UK and the number of ties with the UK that a person has. 

The test also allows an individual who meets certain situations when coming to or leaving the UK to split the tax year so that they are taxed for most purposes as if resident for the UK part of the year and non-resident for the overseas part of the year. Finally, the test includes anti-avoidance provisions, which treat certain income and gains arising to individuals who leave the UK temporarily as accruing in the period of return; tax is then levied at that point. 

I shall now provide an outline of the Government amendments. Amendment 132 has been tabled to the rules for individuals who come to or leave the UK part way through the tax year. There are eight different circumstances in which the tax year can be split into an overseas part and a UK part. At present, the legislation ensures that the case that maximises the UK part of the

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year should be applied when an individual qualifies under more than one case. However, stakeholders have told us that in some situations the legislation will result in outcomes that would be unexpected and illogical. To address that issue, we have included a replacement rule, which provides an order of priority for the split-year cases. Amendment 132 will ensure that the legislation delivers a fairer result. 

Government amendment 135 has been tabled to introduce a transitional rule for individuals and their spouses who return to the UK in 2013-14 from working full time overseas. Government amendment 125 corrects a technical oversight in the legislation whereby an individual who finishes working in the UK just before the start of a tax year could become UK tax resident by spending only a day working in the UK in that tax year. 

Government amendment 126 ensures that people who leave the UK but keep a home here and who happen to die while living overseas will not be treated as being resident here as long as they have spent sufficient time in the tax year up to the date of death in an overseas home. Finally, other Government amendments have been tabled to correct minor drafting errors in the legislation. 

The statutory residence test has been developed in conjunction with the reforms to ordinary residence and in part with the reforms to statement of practice 1/09. Both those other reforms form part of the 2013 Finance Bill. HMRC has recently published full customer guidance on the test along with a pilot version of a new online tool to help customers determine their residence status by answering the relevant questions about their time spent in the UK and other circumstances. Around 4,000 people visited the tool in the first week it was available. 

The statutory residence test applies clear and objective rules that test the time spent in the UK and the connections that a person has to it. The test will be simple for the vast majority of people to apply, although there are more detailed rules for those in more complicated situations. Overall, the test will bring greater certainty and clarity to all taxpayers, in particular those who move between countries and whose present status may be uncertain. 

Sheila Gilmore (Edinburgh East) (Lab)  rose—  

The Chair:  I call Catherine McKinnell. 

Catherine McKinnell:  I thank you, Mr Amess, and thank the Minister for his explanation. I am sure that when he responds to the queries I am about to raise, my hon. Friend the Member for Edinburgh East will be able to pose an additional question to him. As the Minister has explained, clause 215 and the incredibly long schedule 43 introduce a statutory residence test, made up of a series of tests, which will determine an individual’s residence for tax purposes with effect from 6 April 2013. The statutory residence test introduces a definition of residence for tax purposes, but does not apply to social security or benefits entitlement, so there are still multiple rules for residence. One of the professional bodies, the Chartered Institute of Taxation, described that as “disappointing” and “needing attention”, so I would be grateful if the Minister could address such concerns in his closing remarks. For the first time, the

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new rules lay down a statutory definition of residence, which has been looked at for a good number of years, but they remain “far too complex”, in the view of the same professional body. 

The Institute of Chartered Accountants in England and Wales, because of the sheer length and complexity of the legislation, stated: 

“It is doubtful that an unrepresented individual will be able to navigate the legislation correctly particularly if they are not definitely resident and not definitely non-resident but in the middle ground.” 

The Low Incomes Tax Reform Group, too, has shared some of its concerns, highlighting: 

“Migrants to and from the UK are a mixture of people with varying personal circumstances, but a great many are migrant workers and students on low incomes. These are unrepresented taxpayers who cannot afford professional fees and for whom sources of tax advice are limited or non-existent.” 

Returning to the concern that several different definitions of residence remain, depending on the area of government policy, the LITRG goes on to state: 

“We stress again that it would be far clearer if all government rules relating to residence were to follow the same definition as closely as possible. The low-income migrant will struggle with rules concerning: their right to live and/or work in the UK; tax; social security contributions; entitlement to healthcare; entitlement to benefits; and, very likely, how the UK rules interact with those in their country of origin. And all without being able to afford advice.” 

That is obviously an important concern, and I would be grateful if the Minister could explain how the welcome but complex new rules will be understood by those who are not in the fortunate position of being able to afford tax advice. How will low-income migrants be informed of the need to keep detailed records of their movements in order to prove their position under the new rules? 

Furthermore, records need to be kept not only by employees, but by employers. In cases where people are defined as being resident and therefore taxable in the UK and subject to PAYE, but with the penalty regime applicable to PAYE errors—coupled with the recent introduction of PAYE real-time information or RTI—all but the smallest employers will be concerned. Most do not have the benefit of in-house tax teams. Will the Minister outline what support the Government have committed to HMRC to guide employers through the changes? 

The commencement date of 6 April 2013 is also a concern. People will be arriving in and leaving the UK during this tax year, but before Royal Assent. Although the draft legislation has been in existence for some months, and its likely shape has been known for some time, in some cases people might have made mistakes before the rules were formally published. Will the Minister therefore outline how such people are likely to be treated, if they fall foul? Can they elect to be treated as resident or not, under the old rules, for the transition year? 

On a separate note, can the Minister explain what will happen to people when they cannot leave the UK for reasons beyond their control? Will he confirm that they will not become resident if they are unable to leave the UK, because of—for example—an airport closure, transport delays or some other reason? Will the Minister give some clarification on how such people might be treated? 

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Finally, given the complexity and length of the new rules, what steps does the Minister intend to take to ensure that they are kept under review, and simplified wherever possible? Will he commit to a date by when the rules will be reviewed, as they are a significant change from the centuries of case law relied on up to this date? In particular, the ICAEW has indicated that 

“the stated aim of the legislation is to provide certainty but because of the complexity and the provision that the rules can be changed by statutory instrument, possibly without consultation, it does not achieve that aim.” 

If the Minister can also address those concerns, I will be grateful. 

Sheila Gilmore:  My question is relatively simple: will the Minister explain exactly how the measure will work for people claiming child benefit? Will exactly the same rules apply? 

Mr Gauke:  Before dealing with the particular questions that have been raised by Opposition Members, for which I am grateful, it is worth reminding the Committee that we currently have a test based on case law. That in itself creates a great deal of confusion and uncertainty. Tax professionals have been calling for a statutory residence test for some years. There have been attempts to deliver such a test in the past, but they have not succeeded. It is therefore something of an achievement finally to have before us a statutory residence test. 

I know that the rules are long, and I appreciate that a lot of legislation is included, but it is perhaps worth pointing out that the test has been welcomed, to some extent. In its press release of 11 December following the publication of the most recent consultation documents, the Chartered Institute of Taxation said: 

“It is on the surface disappointing that the legislation has grown ever longer but this is a case where longer is better. We need the rules to bring certainty to as many taxpayers as possible and that means spelling out the rules in the law.” 

I accept that the legislation is of considerable length, but that reflects the fact that the test is comprehensive, considers a wide range of circumstances and is able to come to the right conclusion. 

I do think that the new legislation will be easier to apply than the old rules. The statutory residence test will replace the current uncertain and complicated rules with a test that is more transparent, mechanical and objective. I accept that the new rules will take a little getting used to because they look rather different from the old ones, being much more mechanical, but once users become familiar with the mechanics, they should be more straightforward to apply and result in fewer residence disputes with HMRC. 

On the specific question of complexity in the context of migrant workers in low income bands who will not be able to afford expert tax advice, it is worth highlighting the online tool that HMRC will be providing. It takes customers through a series of simple yes or no questions to establish their residence status. That is available to everyone, including unrepresented taxpayers, of course, and it is an advance on what we have had in the past. 

In terms of the application to national insurance contributions, we gave careful consideration to including them, but concluded that annual tests for national insurance contributions would require significant structural

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change and upheaval for employers. It is sensible, at least initially, to keep the existing national insurance residence tests and liabilities aligned with the rest of the social security system. The longer term position will depend in part on the Government’s consideration of greater integration of income tax and national insurance contributions. 

As for the application of the rules to other Government Departments, it is true that some Departments look at residence in different ways. In establishing entitlement to pension credit, for example, the Department for Work and Pensions requires customers to have the right to reside and to be habitually resident in the UK, the Republic of Ireland, the Channel Islands or the Isle of Man. Aligning the different residence rules across all Departments would inevitably lead to different residence outcomes for the sections of the public affected, which would have significant Exchequer and other impacts. We need to be careful before we can commit to going down that route. 

4.45 pm 

On whether we will consult on future changes by statutory instrument, it is of course the case that all taxes are kept under review. Clause 215 contains a provision for further consequential or transitional provisions to be made by statutory instrument. We have no plans at present to use that power, but we will follow the usual consultation process if we do. 

A question was asked about aeroplane delays or travel disruption of some sort and whether there was any flexibility within the regime. There is flexibility in exceptional circumstances, but whether a situation constitutes an exceptional circumstance will depend on the facts and the circumstances of each. The event in question must be both beyond control and exceptional, and the individual would need to be able to demonstrate that they made every possible effort to get out of the United Kingdom by any means. Adverse weather conditions that tend to happen frequently in winter will not usually fall under the definition, but it is at least in theory possible for them to apply. 

I was asked whether it was fair to charge interest on tax unpaid because the rules have not allowed a person to establish their taxable position in time. Interest of course does not penalise; it merely puts the individual in the position they would have been had they paid the correct amount of tax on time. 

On whether penalties will result from the submitting of amended self-assessment returns, penalties will arise from the late filing of a return. A fixed penalty of £100 applies if a return is not filed by the appropriate deadline. People normally have 12 months from 31 January after the end of the tax year to correct a return they have submitted. There will be no penalty attached to additional tax paid as a result of an amendment provided that the individual has made their best endeavours to submit complete and correct information, but interest will be due in accordance with the late payment interest rate, which is currently 3% for all the main taxes. 

On the question about child benefit, we have not extended the statutory residence test beyond tax for the reasons I outlined earlier. 

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I hope that I have provided clarification to the Committee in response to some detailed questions. The reform is significant and will make our tax system more comprehensible and clearer to many people. 

Question put and agreed to.  

Clause 215 accordingly ordered to stand part of the Bill.  

Amendments made: 125, in schedule 43, page 497, line 40, leave out ‘in’ and insert 

‘which falls in both that period and’. 

Amendment 126, in schedule 43, page 498, line 38, at end insert 

‘, and 

(e) if P had a home overseas during all or part of year X, P did not spend a sufficient amount of time there in year X.

‘(2) In relation to a home of P’s overseas, P “spent a sufficient amount of time” there in year X if—

(a) there were at least 30 days in year X when P was present there on that day for at least some of the time (no matter how short a time), or

(b) P was present there for at least some of the time (no matter how short a time) on each day of year X up to and including the day on which P died.

(3) In sub-paragraph (2)—

(a) the reference to 30 days is to 30 days in aggregate, whether the days were consecutive or intermittent, and

(b) the reference to P being present at the home is to P being present there at a time when it was a home of P’s.

(4) If P had more than one home overseas—

(a) each of those homes must be looked at separately to see if the requirement of sub-paragraph (1)(e) is met, and

(b) that requirement is then met so long as it is met in relation to each of them.’.

Amendment 127, in schedule 43, page 508, line 18, after ‘even’ insert ‘if P’. 

Amendment 128, in schedule 43, page 514, line 38, after ‘taxpayer’ insert 


(a) ’.

Amendment 129, in schedule 43, page 514, line 40, at end insert 

‘, but 

(b) was resident in the UK for one or more of the 4 tax years immediately preceding that year.’.

Amendment 130, in schedule 43, page 517, line 12, after ‘in the’ insert ‘part of the’. 

Amendment 131, in schedule 43, page 517, line 37, leave out from ‘is’ to end of line 40 and insert 

‘the part of that year defined below— 

(a) for the Case in question, or

(b) if the taxpayer’s circumstances fall within more than one Case, for the Case which has priority (see paragraphs 53A and 53B).’.

Amendment 132, in schedule 43, page 518, line 22, at end insert— 

‘Priority between Cases 1 to 3

53A (1) This paragraph applies to determine which Case has priority where the taxpayer’s circumstances for the relevant year fall within two or all of the following—

Case 1 (starting full-time work overseas);

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Case 2 (the partner of someone starting full-time work overseas);

Case 3 (ceasing to have a home in the UK).

(2) Case 1 has priority over Case 2 and Case 3.

(3) Case 2 has priority over Case 3.

Priority between Cases 4 to 8

53B (1) This paragraph applies to determine which Case has priority where the taxpayer’s circumstances for the relevant year fall within two or more of the following—

Case 4 (starting to have a home in the UK only);

Case 5 (starting full-time work in the UK);

Case 6 (ceasing full-time work overseas);

Case 7 (the partner of someone ceasing full-time work overseas);

Case 8 (starting to have a home in the UK).

(2) In this paragraph “the split year date” in relation to a Case means the final day of the part of the relevant year defined in paragraph 53(5) to (9) for that Case.

(3) If Case 6 applies— If Case 7 (but not Case 6) applies— If two or all of Cases 4, 5 and 8 apply (but neither Case 6 nor Case 7), the Case which has priority is the one with the earliest split year date.

(a) if Case 5 also applies and the split year date in relation to Case 5 is earlier than the split year date in relation to Case 6, Case 5 has priority;

(b) otherwise, Case 6 has priority.

(c) if Case 5 also applies and the split year date in relation to Case 5 is earlier than the split year date in relation to Case 7, Case 5 has priority;

(d) otherwise, Case 7 has priority

(6) But if, in a case to which sub-paragraph (5) applies, two or all of the Cases which apply share the same split year date and that date is the only, or earlier, split year date of the Cases which apply, the Cases with that split year date are to be treated as having priority.’.

Amendment 133, in schedule 43, page 558, line 14, leave out ‘or 2015-16’ and insert ‘2015-16, 2016-17 or 2017-18’. 

Amendment 134, in schedule 43, page 558, line 40, at end insert 

‘, and 

(c) paragraph 49 of this Schedule has effect in relation to that year as if in sub-paragraph (2) for the words from “because” to the end there were substituted “in circumstances where the taxpayer was working overseas full-time for the whole of that year.”’.

Amendment 135, in schedule 43, page 559, line 17, at end insert— 

(1) Sub-paragraph (2) applies in determining whether the test in paragraph 50(3) is met where the relevant year is the tax year 2013-14.

(2) The circumstances of a partner of the taxpayer are to be treated as falling within Case 6 for the previous tax year if the partner was eligible for split year treatment in relation to that tax year under the relevant ESC on the grounds that he or she returned to the United Kingdom after a period working overseas full-time.

(3) Where the circumstances of a partner are treated as falling within Case 6 under sub-paragraph (2), the reference in paragraph 50(7)(b) to the UK part of the relevant year as defined for Case 6 is a reference to the part corresponding, so far as possible, in accordance with the terms of the relevant ESC, to the UK part of that year.

(4) “The relevant ESC” means whichever of the extra-statutory concessions to which effect is given by Part 3 of this Schedule is relevant in the partner’s case.’.—(Mr Gauke.)

Schedule 43, as amended, agreed to.  

Column number: 624 

Clause 216 

Ordinary residence 

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

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 136 to 140. 

That schedule 44 be the Forty-fourth schedule to the Bill. 

Mr Gauke:  Clause 216 introduces schedule 44, which abolishes the concept of ordinary residence for most tax purposes. More than 100 provisions in primary legislation that use the concept of ordinary residence, sometimes in conjunction with residence, will in future refer only to residence, which represents a significant and welcome simplification of the tax code. 

Previously, people coming to the UK had to think about three things that affect taxation: residence, ordinary residence and domicile. With the reforms, they will have to consider only residence and domicile. The main tax relief available to individuals who are not ordinarily resident, which allows overseas earnings not remitted to the UK to stay out of the UK tax net, will be retained and simplified. That relief, known as overseas workday relief, will be made available to all non-domiciled arrivers who come to the UK having not been UK-resident in the previous three years. 

Chris Leslie (Nottingham East) (Lab/Co-op):  I might be able to save the Minister some time, because we have only one question: why will references to ordinary residence remain in some statutory instruments and other pieces of statute? If he addresses that point, we will be satisfied. 

Mr Gauke:  I am delighted that the hon. Gentleman will be satisfied with that. I stood to address the various amendments, but if he is satisfied with the measures—I know that he and his party have carefully read the measures and the amendments that have been tabled—I am happy to bring my comments to a conclusion. 

There are a number of places remaining in primary tax legislation where the term “ordinary residence” is used in a very specialist sense, for example when referring to ordinary residence in Scotland or Northern Ireland, rather than in the UK as a whole. We have made a conscious decision to leave those references to ordinary residence in tax legislation as we do not want to change how those provisions are applied. 

Given the enthusiasm for the clause, the amendments and the schedule, I am inclined to conclude that the abolition of ordinary residence, which is a vague, subjective and complicated tax status, is welcome. The main relief linked to the status will be replaced with a relief that is far more straightforward and certain. This package of changes has been warmly welcomed by industry commentators. The relief will now be available to all non-domiciled employees arriving in the UK who have not been UK-resident for the previous three tax years, regardless of the length of time they intend to stay here.

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The relief will be available for the year in which the employee becomes UK-resident plus the two following tax years. 

Question put and agreed to.  

Clause 216 accordingly ordered to stand part of the Bill.  

Schedule 44 

Ordinary residence 

Amendments made: 136, in schedule 44, page 563, line 29, leave out from beginning to ‘for’ in line 30 and insert— 

(a) was resident in the United Kingdom’.

Amendment 137, in schedule 44, page 563, line 31, leave out ‘is’ and insert ‘was’. 

Amendment 138, in schedule 44, page 565, line 24, leave out paragraph 38 and insert— 

38 (1) Section 413 (exception in certain cases of foreign service) is amended as follows.

(2) In subsection (2), after “subsection” (in the second place it occurs) insert “(2A),”.

(3) After that subsection insert—

(2A) This subsection applies to service in or after the tax year 2013-14—

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(a) to the extent that it consists of duties performed outside the United Kingdom in respect of which earnings would not be relevant earnings, or

(b) if a deduction equal to the whole amount of the earnings from the employment was or would have been allowable under Chapter 6 of Part 5 (deductions from seafarers’ earnings).”

(4) In subsection (3), after “2003-04” insert “but before the tax year 2013-14”.

(5) After that subsection insert—

(3ZA) In subsection (2A)(a) “relevant earnings” means earnings for a tax year that are earnings to which section 15 applies and to which that section would apply even if the employee made a claim under section 809B of ITA 2007 (claim for remittance basis) for that year.”’.

Amendment 139, in schedule 44, page 569, line 36, leave out from beginning to ‘for’ in line 37 and insert— 

(a) was resident in the United Kingdom’.

Amendment 140, in schedule 44, page 569, line 38, leave out ‘is’ and insert ‘was’.—(Mr Gauke.)  

Schedule 44, as amended, agreed to.  

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

4.53 pm 

Adjourned till Thursday 20 June at half-past Eleven o’clock.  

Prepared 19th June 2013