Session 2014-15
Publications on the internet
Finance Bill
Finance Bill
The Committee consisted of the following Members:
Chairs: † Martin Caton , Mr Gary Streeter
† Dakin, Nic (Scunthorpe) (Lab)
† Dinenage, Caroline (Gosport) (Con)
† Duddridge, James (Rochford and Southend East) (Con)
† Elphicke, Charlie (Dover) (Con)
† Evans, Chris (Islwyn) (Lab/Co-op)
† Fuller, Richard (Bedford) (Con)
† Garnier, Mark (Wyre Forest) (Con)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
† Gilmore, Sheila (Edinburgh East) (Lab)
† Glindon, Mrs Mary (North Tyneside) (Lab)
Hames, Duncan (Chippenham) (LD)
† Heaton-Harris, Chris (Daventry) (Con)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Kane, Mike (Wythenshawe and Sale East) (Lab)
† Kwarteng, Kwasi (Spelthorne) (Con)
Leadsom, Andrea (Economic Secretary to the Treasury)
Leslie, Chris (Nottingham East) (Lab/Co-op)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† McKenzie, Mr Iain (Inverclyde) (Lab)
† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† Mearns, Ian (Gateshead) (Lab)
† Morgan, Nicky (Financial Secretary to the Treasury)
† Pearce, Teresa (Erith and Thamesmead) (Lab)
† Pincher, Christopher (Tamworth) (Con)
† Rudd, Amber (Hastings and Rye) (Con)
† Rutley, David (Macclesfield) (Con)
Shelbrooke, Alec (Elmet and Rothwell) (Con)
† Smith, Henry (Crawley) (Con)
Vaz, Valerie (Walsall South) (Lab)
† Wheeler, Heather (South Derbyshire) (Con)
† Williamson, Chris (Derby North) (Lab)
Wilson, Sammy (East Antrim) (DUP)
Matthew Hamlyn, Kate Emms, Committee Clerks
† attended the Committee
Public Bill Committee
Tuesday 10 June 2014
(Morning)
[Martin Caton in the Chair]
Finance Bill
(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules)
Clause 68
Partnerships
Amendment proposed (13 May): 15, in clause 68, page 58, line 40, at end insert—
‘( ) The Chancellor of the Exchequer shall, within six months of the passing of this Act, publish and lay before the House of Commons a report setting out the impact, over the next three years, of the changes made to the Corporation Tax Act 2009 and the Income Tax (Trading and Other Income) Act 2005 by Schedule 13.
( ) The report must in particular set out—
(a) how much additional tax revenue the measures introduced by this section are expected to generate to the UK Exchequer, for each year in which they are in operation; and
(b) the impact of those measures on revenues lost to the Exchequer as a consequence of tax avoidance schemes for each year in which they are in operation.”—(Shabana Mahmood.)
9.10 am
Question again proposed, That the amendment be made.
The Chair: I remind the Committee that with this we are discussing the following:
That schedule 13 be the Thirteenth schedule to the Bill.
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to welcome you back to the Chair, Mr Caton, as we continue our deliberations. I am sure that all members of the Committee feel like we have never been away, but we are now in the final stretch of our consideration of the Bill and I am sure that we will continue to enjoy ourselves just as much as we have done up to this point.
The Minister has allayed some of the concerns about the clause that had been raised by stakeholders and answered many of my questions. Given his assurances, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 68 ordered to stand part of the Bill.
Clause 69
Transfer pricing: restriction on claims for compensation adjustments
Question proposed, That the clause stand part of the Bill.
Shabana Mahmood: The clause deals with transfer pricing, which is an integral part of ensuring fairness in the tax system. It is designed to iron out tax inconsistencies that arise when transactions take place between connected parties. In essence, the rules exist to ensure that the right prices are charged between connected parties on international transactions, although they also apply to transactions in the UK. When transfer pricing rules are utilised—when transactions have not been carried out at arm’s length and when a UK tax advantage has accrued—the effect is to increase one party’s profit. It is sometimes possible for the other party involved in the transaction to make a claim to reflect the same price, which is known as a compensating adjustment. At present, companies and individuals can claim compensating adjustments.
One unintended consequence of the compensating arrangements has been that although, on one side of the arrangement, the taxable profit has increased, on the other side, the taxable income at the higher rate has been reduced without affecting the cash position of either party. Individuals are therefore able to extract income from their businesses at the corporate tax rate rather than the income tax rate.
The technical note on the clause states:
“Large partnerships often employ their staff through a separate service company, which the partnership owns. This arrangement can be used for a number of reasons not related to tax. However, by choosing not to pay an appropriate fee to the company for providing this service, the partnership can activate the tax rules to gain an advantage. HMRC is aware that the structure has been promoted as a method to reduce tax liability for smaller partnerships.”
The clause is therefore designed to restrict the use of compensating adjustments when they generate such income tax advantages. Specifically, the main change will prevent persons other than companies within the charge to income tax from claiming a compensating adjustment where the counterparty is a company. That means that if the compensating adjustment claim is denied but the claim would have related to excess interest paid by the counterparty, the excess interest—over an arm’s length amount—will be treated for income tax purposes as a dividend rather than interest, and will be taxed at dividend rates rather than at rates applicable to interest. The changes will take effect in relation to amounts that are referable to times on or after 25 October 2013. Any amounts accruing before that time, whether interest or service fees, are outside the scope of the clause.
We support measures to prevent schemes whose sole purpose is to avoid paying tax, so we support the clause. However, I want to ask the Minister a small number of questions. In the document on compensating adjustments by Her Majesty’s Revenue and Customs that was issued in October 2013, HMRC estimated that receipts would increase by about £70 million per annum. However, in the autumn statement, much higher figures were given, with the post-behavioural Exchequer impact in 2015-16 estimated at £125 million. Will he explain the difference between those two sets of figures and tell us the methodology used to calculate them?
Will the Minister tell us his estimate of how many of these arrangements are seen every year? Additionally, I would be grateful if he could tell us how HMRC became aware that structures promoting the reduction of tax liabilities for smaller partnerships were being set up and whether he plans to review the measure to ensure that no other avoidance schemes flourish as unintended consequences of clause 69.
9.15 am
The Exchequer Secretary to the Treasury (Mr David Gauke): It is a great pleasure to serve under your chairmanship once again, Mr Caton. As we have heard, clause 69 makes changes to prevent individuals from exploiting transfer pricing legislation to generate an overall reduction in tax liability.
Transfer pricing legislation is designed to ensure that connected parties transact with one another at a market arm’s length rate. Although the main purpose of the legislation is to ensure that the UK receives a fair profit return on cross-border transactions, it also applies to transactions conducted between connected persons wholly within the UK.
Within the UK, if the legislation increases one party’s profits, the person at the other end of the transaction may claim a compensating adjustment, which has the effect of reducing that person’s taxable income by an amount equal to the adjustment. Wealthy individuals and large partnerships have been using the mechanism to take income from companies that they control without paying the full amount of income tax. That is achieved because the transfer pricing and compensation adjustment rules increase the profit taxable at lower corporation tax rates, but reduce the income taxable at the higher rate of income tax, which is currently 45%. The cash movement, however, is unchanged. It stays with the individuals, so they effectively obtain income that would normally be taxed at personal rates of income tax, but pay only the corporation tax rate.
The clause will remove individuals’ ability to claim compensating adjustments when the counterparty to the transaction is a company. Some modifications apply for payments of interest. When the compensation adjustment claim is denied but the claim would have related to excess interest paid by the counterparty, the excess interest over the arm’s length rate will be treated for income tax purposes as a dividend rather than interest, which means that the excess will be taxed at dividend rates, rather than rates applicable to interest.
The clause will mainly affect individuals who are making loans to a company not on arm’s length terms. Affected businesses will include those in private equity, but the measure is not targeted at that sector, and the legislation will affect a range of private companies. It will also affect companies that are under-remunerated by large professional partnerships for the services that the company performs for the partnership. The measure is expected to yield £530 million over the next five years.
The hon. Lady referred to the changes in yield numbers. The revenue estimates are subject to the scrutiny of the Office for Budget Responsibility. I confirm that the figures were certified by the OBR following the rigorous procedures that the Government have introduced. The initial estimates were revised upwards following further scrutiny, which is why we have the present number.
How did HMRC become aware of the arrangements? Marketing material was produced by some of the larger accountancy firms, which resulted in greater scrutiny by HMRC. A significant number of taxpayers have entered such schemes. There is also evidence that the schemes are increasingly being marketed as a way to avoid tax. If the Government do not act, there will be increasing losses of tax and an increased risk to the Exchequer.
The clause will prevent the compensation adjustment rules from being used to avoid tax. It supports the Government’s objectives of fairness in the tax code and I hope that it will stand part of the Bill.
C lause 69 accordingly ordered to stand part of the Bill.
Clause 70
Excise duties and other taxes
Question proposed, That the clause stand part of the Bill.
Catherine McKinnell (Newcastle upon Tyne North) (Lab): It is a pleasure to serve under your chairmanship, Mr Caton.
We come to part 2 of the Bill. Clause 70 is the first in a series of clauses dealing with excise duties and other taxes. It makes several changes to alcoholic liquor duties. It cuts the rate of duties on beer, freezes the rates of duty on spirits and most ciders, and removes the duty escalator for wines and high-strength sparkling ciders. The tax information impact note estimates that the changes will cost £290 million in 2014-15, rising to £325 million in 2018-19.
As hon. Members will no doubt be aware, rates of duty on alcoholic drinks have been the subject of vigorous campaigning by various industries and their representative organisations in recent months, largely as a result of the Government’s decision to cut beer duty—and it was only beer duty—in last year’s Budget. The British Beer and Pub Association called for another cut in beer duty further to support and protect jobs in the industry. The Wine and Spirit Trade Association, as part of its “Call time on duty” campaign, called on the Government to provide similar treatment for wine and spirits. While wine has not received duty cuts or freezes similar to those for beer and spirits, the association believes that its proposals would protect and even create thousands of jobs. Indeed, the Opposition have long called on the Government to conduct a proper and thorough review of alcohol duties, and their impact on respective industries, especially in light of the coalition’s 2011 decision to increase VAT, which added 6p to the price of a pint of beer alone.
Richard Fuller (Bedford) (Con): Given what the hon. Lady is saying, does she agree that the previous Labour Government’s decision to introduce a beer duty escalator was a mistake?
Catherine McKinnell: We are discussing the amendments and clauses in front of us today. I am pointing out that the Opposition tabled amendments to address this point to various Finance Bills, especially last year’s, when we asked the Government to undertake a thorough review
of the impact of these duties on the variety of industries that rely on a fair duty system, especially the Scotch whisky industry, which has campaigned against the rise in duties. The Government’s failure to give fair treatment across the board has affected that industry’s sales and levels of employment. The Opposition have consistently called on the Government to conduct a thorough review into the impact of duty rates on business and consumers, and I have tabled a number of written parliamentary questions to try to get answers on these issues.In light of the assurances given by the previous Economic Secretary to last year’s Bill Committee, it would be helpful if the Financial Secretary to the Treasury would outline the context to the Government’s decision to cut these duties in this year’s Bill. Will she outline the impact of the cut in beer duty last year on the beer and pub trade in the UK? How many jobs have been created as a result of that duty reduction?
Ian Mearns (Gateshead) (Lab): I should declare an interest, as I have been known to have the occasional pint of beer. However, that is a common interest among many members of the Committee, so it should not be too influential.
The way in which the 1p reduction in beer duty has been greeted by some people takes the change out of context. I have bought beer in a number of different places at different prices. For instance, in Gateshead, I can still purchase a pint for under £2, but last night I went to a hostelry near to my flat where it was £4.10, so the 1p reduction in duty was like a double-glazing salesman saying, “Buy 410 and get one free.”
Catherine McKinnell: My hon. Friend makes a valuable point and I am pleased that he has declared his interest in this matter. He pre-empts another question that I have for the Minister: how many customers and taxpayers have seen a 1p reduction in the cost of their pint down at their local? That was promised as part of the price reduction, but the tax information and impact note expresses a degree of uncertainty, so more clarity would be useful.
I want to turn to the important issue of alcohol duty fraud and the illicit market. HMRC now produces annual estimates of the tax gaps across a range of taxes and excise duties. According to its latest estimates, which were published last September, the mid-point estimate for the alcohol tax gap in 2011-12—the latest year for which data are available—is just over £1 billion, including VAT losses. However, at the upper estimate, the gap for 2011-12 is just under £2 billion. The majority of the tax gap stems from illicit beer, which HMRC believes accounts for between £550 million and £750 million in lost Exchequer revenue. A 2012 report from the Public Accounts Committee seems to support that view. It also found that the main source of lost revenue stems from beer produced in and initially exported from the UK, but then illegally re-imported into the UK without the duty being paid. The report suggests that of the 450 million litres of beer exported to Europe each year, 180 million litres are then re-imported illegally.
The Government consulted on measures to tackle alcohol fraud on two separate occasions in 2012 and 2013. In 2012, the consultation examined options for strengthening existing legislation and enforcement measures
while proposing schemes to clamp down on fraud in wholesale and excises businesses. The proposals included fiscal marks on beer containers and supply-side legislation requiring track and trace systems. However, these measures were not taken forward by the Government, as was made clear in a written statement in July 2013 by the then Economic Secretary to the Treasury.In a written statement, the Government committed to continue to explore track and trace technologies. Will the Financial Secretary confirm whether they have done that, and if we are any closer to seeing technologies implemented in the supply chains to protect those vital revenues? We are now almost two years on from the commitment made in the written statement, so presumably new technologies that could prove effective and that would be practical to implement are out there.
There was an assumption in the industry that beer fiscal stamps would place an undue burden on producers and importers, and would therefore not be permissible under EU law. The Financial Secretary recently told me in an answer to a written parliamentary question that the cost to apply stamps to cans and bottles at the time of manufacture could be a fraction of a penny per container, but could be much higher for imports. The Treasury estimates that beer fiscal stamps would involve a £6 million set-up cost and £31 million annual cost to the industry. It is worth noting that, according to the British Beer and Pub Association, 82% of beer sold in the UK is produced in the UK, meaning that a relatively small proportion of the beer sold in the UK would be subject to higher costs.
Others have cited the success of fiscal stamps on spirits, which were introduced by the previous Labour Government in 2006. Of course, that system is still in force today, and it appears to have had a positive impact on illicit sales. Although HMRC does not believe it is possible to assess the specific effect of duty stamps in this case, there was a significant fall in revenue loss over the same period. Given the far more significant beer duty tax gap, do not Ministers believe that similar measures might well be equally effective? It will be helpful if the Financial Secretary is able to confirm whether the estimate of annual costs to the industry of £31 million takes account of the disproportionate costs for imported beer producers, as opposed to domestic producers.
9.30 am
Last year, the Government consulted on further steps they and HMRC could take to tackle alcohol fraud, with three clear outcomes becoming apparent, which I am sure the Minister will mention. All three measures were announced in the autumn statement 2013 and reconfirmed in Budget 2014, with the Government estimating that the wholesaler registration scheme will cost about £235 million when it is implemented in 2016. I recognise that Ministers want to carry out rigorous pre-registration checks first, but with wholesalers clearly already struggling with competition from illicit traders, the registration scheme, regarded by the Government as critical to anti-fraud measures, is needed now, not in three years’ time. Given that the alcohol tax gap already stands at between £1 billion and £2 billion, by HMRC’s varying estimates, could the Minister explain why the Government’s flagship scheme to tackle alcohol fraud is not to be fully implemented until 2017?
The joint alcohol anti-fraud taskforce, which is made up of senior officials from HMRC, Border Force, the Home Office, Trading Standards and key industry stakeholders, held its inaugural meeting on 16 January this year. The Government said at the time:
“This will be followed in 2014 with the establishment of expert working groups to progress areas of concern.”
Will the Minister update the Committee on officials’ progress in setting up expert working groups and highlighting or progressing areas of concern? What areas have the Government identified to focus on? The taskforce’s stated aim is to prevent fraud and make it more difficult for fraudsters to operate through improved intelligence and information sharing. Is the Minister able to elaborate on the taskforce’s work to date, perhaps providing examples of where information sharing and intelligence gathering have taken place? That would be helpful to the Committee.
Richard Fuller: It is a pleasure to serve under your chairmanship, Mr Caton. If the Committee will indulge me for a few minutes, I wish to add a couple of words in support of beer and of Her Majesty’s Government.
I think it was my right hon. Friend’s predecessor as Financial Secretary, now the Secretary of State for Culture, Media and Sport, who made the first strike on behalf of beer drinkers and employees of the brewing industry last year. My right hon. Friend has continued that tradition in this year’s Budget, and I commend her for her stance on the principle of beer duty. Behind that is a more substantive issue, which is the principle of taxation escalators, much beloved by the Labour Government and undermined and abolished by the coalition Government. I wonder, in a free society, what is the merit of a Government deciding to increase tax automatically year after year on basic products—necessities for some people in their everyday life. We saw that in both fuel duty and beer duty. It seems to me an unsound principle of public finance to make projections on the assumption that Government can go on increasing taxation on ordinary people’s everyday expenditures in order to fulfil their ambitions. Judging by what we have heard from the Opposition in this debate and elsewhere, I fear that, unfortunately, that principle will be reintroduced should they ever get back into power.
Chris Williamson (Derby North) (Lab): I am interested in the hon. Gentleman’s comments about increasing taxes on everyday expenditure for ordinary people. Does he therefore disagree with the Government’s decision to ratchet up VAT?
Richard Fuller: The hon. Gentleman makes a legitimate point, but he did not listen to what I said. What I said was that the principle of automatic annual increases in taxation—that a Government in a free society should be able to set a direction of taxation that says, “For us to meet our expenditure commitments in future years, we shall now say that every year the rate of taxation shall increase”—is of questionable intellectual merit. To reply to his question, if, when the Government had to restore our public finances from the disastrous deficit that the previous Government left, they had said that we would increase VAT—the tax that he chose to
highlight—year on year, his point would have been valid, but that is not what the Government decided to do.Nic Dakin (Scunthorpe) (Lab): The hon. Gentleman is being typically robust. Would he like to get rid of the tobacco accelerator as well?
Richard Fuller: The hon. Gentleman makes a good point, which I am trying to explore. I would be interested to know whether we could have a debate on that matter, Mr Caton. If we cannot, because it is not in this Bill, perhaps we should do so elsewhere.
I ask the hon. Gentleman to focus on the principle, though. The previous Government got the country’s finances into a terrible state. Underpinning some of that were certain assumptions made—[ Interruption. ]. Labour Members shake their heads, but I think the British public know why they have gone through all the traumas of the past few years: it is because of the mismanagement of the economy in the period up until 2010. That is clearly understood across the country. The point I am trying to make, regardless of party, is that it is important that, when we set the public finances, we stick to sustainable principles, and I am not sure that to assume increases in the rate of taxation year on year is a sound principle of public finance.
Ian Swales (Redcar) (LD): Does the hon. Gentleman share my concern that a pint of beer would cost 8p more now if this Government had kept the escalator left behind by the previous Government? Those Members who deride the 1p cut in duty are forgetting what the effects of the escalator would have been.
Richard Fuller: My hon. Friend’s comment stands on the record. I have made my point about the escalator.
The other aspect of this debate is jobs. I am proud to represent Bedford and proud that one of the largest local employers in my constituency is Charles Wells, which is the largest family-owned brewery in the country and is recognised by all political parties as a significant company. On the opening day of the 2010 election campaign, my right hon. Friend the Chancellor came to Charles Wells to look around. Then the Secretary of State for Business, Innovation and Skills came to Bedford—no doubt to do some polling research to see what the chances were for our Liberal Democrat mayor. Coming in third, as usual, the Leader of the Opposition visited recently to talk about apprenticeships. Jobs in my constituency are the other benefit of the measure the Government have proposed. The impact will be not just on everyday family budgets and beer drinkers, but on jobs in my constituency.
I commend my right hon. Friend the Financial Secretary and ask her whether she shares my belief in the principle of looking for savings wherever we can—in beer duty and other duties—and getting away from the principles left by the previous Government. Perhaps she could address that in her comments.
The Financial Secretary to the Treasury (Nicky Morgan): It is a pleasure to serve under your chairmanship this morning, Mr Caton. The clause sets out the alcohol duty rates from 2014-15. It takes a penny off the tax on
a typical pint of beer, freezes the duty on ordinary cider and freezes the duty on spirits to help the Scottish whisky industry, and limits the increase on wine duty to inflation. As we have just heard—my hon. Friend the Member for Bedford made the case powerfully—with these changes we have stopped the previous Government’s alcohol duty escalator and are helping the pub industry, which plays an important part in British cultural life.About 15 million people across the country visit the pub weekly, but the industry has faced difficulties. Pubs are important community assets that promote responsible drinking, but about 10,000 have closed in the past 10 years, so at Budget 2013 the Government took decisive action to help the pub industry. Given that nearly two thirds of the alcohol served in pubs is estimated to be beer, the Government took a penny off the tax on a typical pint of beer. The hon. Member for Newcastle upon Tyne North asked what that means in real terms. The British Beer and Pub Association has made clear how that decision has helped the pub industry during the past year: 89% of its members reduced or froze their prices, 76% increased investment and 51% employed more staff.
The clause reinforces the Government’s commitment to help the pub industry. It cuts general beer duty by 2% to reduce the tax on an average strength pint of beer by 1p. Before last year, beer duty had not been cut for 40 years. The Government cut it by a penny last year and by another penny this year. A typical pint of beer is now 8p cheaper—as we heard from my hon. Friend the Member for Redcar—than it would have been under the previous Government’s duty plans.
Chris Williamson: Will the Minister concede that it is increasingly more difficult for those who drink—I should declare I have been teetotal since the age of 17—to afford a pint of beer, even with the minuscule reduction, because they are on average £1,600 a year worse off? Those are the figures and they prove themselves, I am afraid.
Nicky Morgan: Those are the figures from the Labour Whips Office. We have previously argued about this on the Floor of the House and probably in this Committee. The figure of £1,600 does not reflect the increase in the personal tax allowance or the changes to the benefits system. We have heard that in Gateshead, a pint of beer can cost less than £2, whereas in Westminster it could cost quite a lot more.
Nicky Morgan: It is possible but the point is, as my hon. Friend the Member for Bedford mentioned, the previous Government’s continued duty escalator would have continued ratcheting up the price of a pint of beer. Under this Government, the typical pint of beer is 8p cheaper than it would have been under the previous Government’s plans. Brigid Simmonds, the chief executive of the British Beer and Pub Association, has noted that,
“over 7,000 jobs over two years, mostly jobs of younger people in Britain’s pubs.”
To ensure the tax on a typical low-strength beer is also cut by 1p a pint, low-strength beer duty is being reduced by 6%. The duty on high-strength beer has two parts: general beer duty and an additional duty. The additional duty on high-strength beer increases by 3.9%, so the clause partially offsets the reduction in general beer duty, reducing the overall duty on high-strength beer by 0.75% and the tax on a typical pint of high-strength beer by 1p. Those changes to beer duty help to achieve the Government’s aim to increase the incentives to produce and consume low-strength beer.
That will specifically help our traditional, drink-led pubs, but the Government are keen to provide support to pubs where the focus on beer is less strong, such as food-led pubs, which tend to sell more wine and spirits than others. The clause stops the previous Government’s duty escalator and limits the duty increase on most wine, made-wine and high-strength sparkling cider to RPI inflation. That keeps the duties on beer and wine broadly similar, as required by EU law. In keeping with EU legal requirements, the duty rate on wine of more than 22% alcohol by volume continues to be the same as on spirits. The clause also freezes the duty on most cider, so that a typical litre of cider is now 6p cheaper than under the previous Government’s duty plans. The west country, home to many of the country’s orchards, was hit hard by winter’s bad weather. This change will help the cider industry. The duty rate on high-strength sparkling cider continues to be the same as equivalent strength sparkling wine, complying with EU legal requirements.
The Scotch whisky industry is one of the great British success stories. Its exports were estimated to be worth more than £4.2 billion in 2012—nearly a quarter of UK food and drink exports. That is why it is important that the Government support this great industry where we can. Earlier this year, the Government introduced the Scotch whisky verification scheme, which will help to protect the integrity and high reputation of the Scotch whisky brand at home and abroad. The domestic market remains important, though, given that it is the third largest market for Scotch whisky. The freeze in spirits duty will cater further support to the Scotch whisky industry. It means that a 70 cl bottle of whisky is now 42p cheaper than it would have been under the previous Government’s duty plans. David Frost, chief executive of the Scotch Whisky Association toasted the Government’s decision, saying:
“This show of support for distillers from the Coalition Government will be warmly welcomed across the Scotch Whisky industry.”
The changes to alcohol duty rates outlined in the clause ensure that responsible drinkers do not continue to be penalised by the alcohol duty escalator inherited from the previous Administration. However, the Government recognise that not everyone is a responsible drinker and we have taken a targeted approach to tackle alcohol-related harms, as set out in the Government’s response to the alcohol strategy consultation in 2013, ranging from banning the sales of alcohol priced below duty plus VAT, to licensing changes to help to tackle irresponsible alcohol consumption.
I will turn, briefly, to the question from the hon. Member for Newcastle upon Tyne North about fraud and the actions of HMRC. The Government recognise the importance of tackling alcohol fraud and will increase HMRC’s ability to remove illicit alcohol from the market
by introducing a wholesaler regime, as she outlined, which is to take effect in 2016. The reason that it is taking between the announcements now and 2016 is that HMRC needs time to set up the scheme and firms need time to register with HMRC. Although from 2017 everyone will need to be registered, the scheme starts from 2016. A requirement for alcohol traders to take reasonable steps to ensure that their suppliers and customers are legitimate will take effect later this year.9.45 am
The hon. Lady mentioned the joint alcohol anti-fraud taskforce, whose first meeting I attended. The taskforce aims to tackle alcohol fraud by bringing together law enforcers, trade bodies and key alcohol industry figures. She asked about information sharing, and the taskforce is looking at that. The industry and Government are working together to explore the options available. She understands that I cannot go into the details of how information and intelligence are to be shared—if I put that on the public record, there would not be much point in trying to catch those who are determined to commit fraud—but one of the taskforce working groups is looking at information sharing.
The hon. Lady asked about fiscal stamps. Responses to our consultation suggest that fiscal stamps could have a disproportionate cost for firms, so the Government are instead taking proportionate action through the wholesaler registration scheme, but we continue to keep the introduction of further measures such as fiscal stamps under review. I should point out that wholesalers are currently the only unlicensed part of the supply chain. She also asked about track and trace. That is under review, but the wholesaler registration scheme is where efforts lie at the moment.
My hon. Friend the Member for Bedford asked about future policy. Obviously I cannot commit on that, but we keep all taxes under review and this Government have shown clearly with this and other measures that, where we can help successful industries—our pubs are a vital part of our communities and I have mentioned the critical role of the Scotch whisky industry in exports and of the cider regime in particular parts of the country, especially the west country—we will always do what we can to help industries and to help businesses to flourish and to take on employees. That is the guiding light of our economic plan.
Ian Mearns: Does the Minister accept that the whisky or spirits duty for domestic markets still stands at about 79p in the pound? We have talked about taking away the escalator and freezing the duty, which has been welcomed by the industry, but at 79p in the pound it is still extremely high for the domestic market, compared with overseas comparators.
Nicky Morgan: I thank the hon. Gentleman for that question. Yes, he will not be surprised to hear that that point has been made to me, in debates in this place and when I have journeyed to Scotland. The point is that this year’s duty freeze sends a clear signal about our support for the industry. More can always be done on any change made by any Government in any Budget announcement, and there will always be people who ask for more, but we took a decision this year on what was manageable within the economic constraints left to us as we sort out the economic situation of this country.
The clause reaffirms the Government’s commitment to supporting community pubs, the thriving Scotch whisky industry and responsible drinkers. I urge the Committee to let the clause stand part of the Bill.
Clause 70 accordingly ordered to stand part of the Bill.
Clause 71
Rates of tobacco products duty
Catherine McKinnell: I beg to move amendment 24, in clause 71, page 61, line 2, at end insert—
‘(3) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish a report on levels of revenue from the rates set out in this section.
(4) The report referred to in subsection (3) above must in particular examine—
(a) changes in revenue due to illicit market share,
(b) action to mitigate any such changes in revenue.
(5) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”
The Chair: With this it will be convenient to discuss clause stand part.
Catherine McKinnell: The clause deals with rates of tobacco duty. In Labour’s final Budget, the then Chancellor announced that tobacco duty would rise by 1% above inflation in that year, 2010, and by 2% above inflation thereafter for the following four years. That policy has been maintained by this Government, including in the clause: indeed, in this year’s Budget, the Chancellor announced that tobacco duty rates will continue to rise by 2% above inflation each year between 2015-16 and 2019-20, although such provisions will continue to be made in each and every Finance Bill.
I am interested to see whether the hon. Member for Bedford in particular will support the Opposition amendment, which asks the Chancellor of the Exchequer to undertake a review of the levels of revenue set out. Our focus is on illicit market share, but the hon. Gentleman could use this opportunity to raise the inquiry into the duty escalator that he seeks from the Government.
Research has consistently shown a link between the price of tobacco products, levels of demand and public health issues, with successive Governments therefore maintaining high tobacco duty rates to discourage the take-up of such habits, particularly by children. It is right, of course, that the Government maintain this policy, but aside from the changes to tobacco duty that I have just set out, the Chancellor’s Budget report also announced the Government’s intention to consult on other measures related to tobacco duties, both of which are to commence this summer. First, the Government intend to consult on a minimum excise tax. Secondly, they intend to consult on
“a range of measures to strengthen its response to tobacco smuggling and improve anti-forestalling controls”,
with a view to legislating in next year’s Finance Bill. Perhaps that is a tacit concession that the Government’s actions to date have done little to tackle this extremely important problem and have perhaps fallen short of initial hopes.
It is worth noting that both of those issues were raised by my hon. Friend the Member for Nottingham East during last year’s Finance Bill Committee: specifically, duty stamps to tackle fraud and a minimum excise tax. Both received particularly vague responses from the then Economic Secretary; none the less, we now find the Government turning their attention once again to tobacco duty fraud, which is also the subject of our amendment 24.
The amendment calls on the Government to take account of changes in revenue due to increasing levels of illicit tobacco trading, as well as, of course, exploring what more the Government can do to mitigate revenue losses, particularly in the light of the Government’s disappointing results to date. HMRC estimates that revenue losses from tobacco smuggling and other sub-economy activities in 2011-12 totalled £1.3 billion. As with HMRC’s alcohol tax gap estimates, that is HMRC’s mid-point estimate. If we take its upper estimate, revenue losses from both cigarettes and hand-rolled tobacco, inclusive of associated VAT losses, could be as high as £2.4 billion. Although that is marginally down on the previous year, it still represents more than £1 billion in lost tax revenues, which is clearly a critical amount in these austere times.
Although HMRC estimates the illicit market share for cigarettes as 7% in 2011-12, the estimated illicit market share for hand-rolling tobacco in the same year was a staggering 35%. Indeed, it is also worth pointing out that tobacco duty receipts have recently been coming in lower than the OBR’s—and presumably the Treasury’s—forecasts. The OBR revised down its forecasts for tobacco duty receipts in its December 2013 report by between £100 and £300 million per year over the next few years, but it has since transpired that those forecasts, reiterated by the OBR in the Budget in March this year, also overestimated tobacco duty revenue.
HMRC’s statistics, published for the most recent year, show that tobacco duty receipts totalled £9.5 billion, yet at the Budget the OBR still expected £9.7 billion in receipts. In fact, HMRC’s latest statistics show that revenue from tobacco duties has actually fallen by more than £100 million compared with the previous year for the first time since 2005. What does the Minister make of these changing trends and the fact that the OBR’s and the Treasury’s forecasts have overestimated tobacco duty revenue? Does she believe they are a result of increases in illicit tobacco products on the market, or are there other reasons such as an increasing take-up of e-cigarettes, or is there a wider—and welcome—trend of people giving up smoking, and fewer people starting to smoke?
Of course, the issue of the illicit tobacco trade does not have consequences only in terms of revenue losses. We also know that illicit cigarettes carry serious public health risks, as well as putting the livelihoods of reputable retailers at risk through being undermined. A recent report in one of my local newspapers reported that illicit tobacco traders often target children, therefore circumventing both excise duty and age of sale legislation. The Chronicle, my local paper, reported that the North East Trading Standards tobacco control project manager, Richard Ferry, pointed out that pubs, shops and private
homes have been used as “tab houses” to sell cigarettes for as little as 25p, which should obviously be of concern to any Government.By way of background, the Government launched the “Tackling Tobacco Smuggling” strategy in April 2011. According to the Public Accounts Committee’s report on HMRC’s progress to date in tackling tobacco fraud, published last October, HMRC planned to use the additional investment that the Government announced in the 2010 spending review to deliver five projects with a total expected benefit of £1.4 billion by March 2015, but the Committee concluded that three of the five initiatives “yielded nothing” by March 2013. In one example it highlighted, officers were working overseas, but HMRC realised that such powers could not be exercised abroad, so revenue yield from the project was reduced from £465 million to £100 million. The PAC concluded that most of the extra £25 million that the Government committed to reinvest in 2010 was spent on business-as-usual tasks, rather than new initiatives.
The National Audit Office was equally damning. It concluded that HMRC is “unlikely” to achieve its target of £1.4 billion in revenue protection, citing the fact that progress by the end of 2012-13 was two thirds of the expected yield. The fact that HMRC is one of the only tax agencies in the world to publish tax gap estimates is to be applauded, but the PAC and NAO are concerned that there remain “significant inaccuracies” in its estimates of the impact of its work. Does HMRC agree with the NAO’s and the PAC’s assessments that the Government’s strategy to date has fallen short of the mark in tackling tobacco fraud and is therefore unlikely to recover more than a fraction of the anticipated £1 billion or so in duty revenue?
No doubt Ministers intend to publish their views on new measures in the forthcoming consultation, but I would be grateful if the Minister set out the Government’s views on some of the measures that we discussed previously in relation to alcohol, such as fiscal marks and track and trace technologies. Do the Government intend to consult on fiscal stamps as a measure to tackle this type of fraud? In last year’s Finance Bill Committee, the then Economic Secretary suggested that the Government were in talks with the EU Commission about track and trace technology and how it might work in practice. It would be helpful if the Minister could update the Committee about those discussions.
I would like to pick up on one aspect of the anti-tobacco fraud strategy. Close working with local authorities and trading standards to tackle fraud is part of the Government’s “Closer Working Protocol”, whose stated aims are to
“implement effective examples of joint-working”
and improve relationships to ensure better enforcement. In May 2013, my local council, Newcastle city council, led the way by creating a declaration committing it to take comprehensive action to address the harm from smoking. Although it covers a range of issues regarding smoking and public health, it acknowledges the role of illicit tobacco in funding criminal activities and giving children access to cheap tobacco.
The declaration is a hugely positive step forward in the fight against illicit tobacco and was subsequently endorsed by various Government agencies, including the Department for Health, as the then public health
Minister made clear in a public letter last June. It has now been accepted by 50 local authorities across England, according to the Smokefree Action website. The declaration seeks to“Protect…tobacco control work from the commercial and vested interests of the tobacco industry by not accepting any partnerships, payments, gifts and services, monetary or in kind or research funding offered by the tobacco industry to officials or employees”.
That is in line with the UK’s obligations under article 5.3 of the World Health Organisation’s framework convention on tobacco control. The Trading Standards Institute clarified that position by making clear that although it is fully committed to meeting that obligation,
“some limited and transparent engagement with the tobacco industry”
is necessary to effectively tackle the illicit tobacco trade. Indeed, Newcastle trading standards has worked with tobacco manufacturers in test purchasing operations to root out what are termed “illicit whites”—cigarettes manufactured purely for the sub-economy market, as my local paper reported.
Considering that the Department of Health has fully endorsed that local strategy, I would be interested to hear from the Minister whether HMRC has had any input into that and whether it considers that joint working with tobacco companies is necessary to combat the illicit trade. Equally, I would be interested to hear what work HMRC is doing with the Department of Health, perhaps alongside Trading Standards, on the impact of the declaration and the wider local government strategy on the level of counter-fraud activity.
10 am
Ian Mearns: In our neck of the woods, there is a concern that tobacco that has been exported from this country and then re-imported is getting on to the streets, but without the duty being paid to Revenue and Customs. There is a deep suspicion in many people’s minds—particularly trading standards officers I have spoken to—that the tobacco industry itself is behind that. There is a suspicion, but it is very difficult to prove.
Catherine McKinnell: I have heard those views expressed. There is a difficult balance to strike, in that working with the tobacco industry can help with intelligence-sharing and tackling illicit, anti-trade activity, but that might not stack up with the health imperative to live up to the declaration I outlined earlier, which many local authorities have now signed up to. I would be interested to hear what HMRC and the Government’s approach is, and whether collaborative work is being done with the Department of Health, so that it can become a national way forward, rather than simply being taken up on a local basis.
To conclude, the Opposition’s amendment 24 calls on the Government to place a renewed focus on the impact of tobacco duty rates on the illicit trade and associated Exchequer revenue losses. Estimated losses from the illicit tobacco trade could be as high as £2.4 billion, according to HMRC’s upper estimates, so it is critical that these matters are kept under constant review, particularly as the Government’s efforts since 2010 appear to have fallen short of the mark. For that reason, I urge hon. Members to back the Opposition’s amendment to place a renewed focus on tobacco fraud and tackling this important issue on the Government’s agenda.
Nicky Morgan: Clause 71 makes changes to ensure that the tobacco duty regime continues to work as part of the Government’s wider health agenda to reduce smoking prevalence—something we can all agree on, on both sides of the House. The clause implements tobacco duty increases of 2% above RPI inflation.
The Government are committed to reducing smoking rates, especially among young people. Smoking is the largest cause of preventable illness and premature death in the UK, killing half of all long-term users. There is no such thing as safe smoking. Treating smoking-related illnesses is also a drain on our public health services, costing the NHS approximately £2.7 billion in 2006-07. Reducing the affordability of tobacco products through taxation is acknowledged to be very effective in reducing smoking prevalence.
Clause 71 increases the duty rate on all tobacco products by 2% above inflation. The change came into effect at 6 pm on 19 March, adding 24p to a packet of 20 cigarettes and 23p to a 25-gram packet of hand-rolling tobacco. Research has consistently shown that the price of tobacco products affects demand. By increasing prices through taxation, we hope to strengthen the Government’s wider health agenda to reduce smoking prevalence, which, as I said, will reduce health inequalities and reduce the cost to the NHS of treating smoking-related illnesses. Research also shows that, in addition to establishing high tobacco duty rates, maintaining high rates is also important in reducing smoking prevalence. That is why annual duty increases of 2% above inflation will continue until the end of the next Parliament.
Let me turn to the Opposition’s amendment 24, which would require the Government to publish a report on the levels of revenue from the duty rates set out in the clause, the changes to revenue due to illicit market share and any relevant actions to mitigate that. As we have heard, it is another Opposition-sponsored review. The Government do not want just to keep having reviews, but actually to make some changes that will have an effect. We want action. I wonder whether all these reviews will be chaired by redundant Labour MPs after the next election. [ Interruption. ] I just wanted to wake the Committee up. The Government already publish the information, so the amendment is superfluous.
The forecasted revenue impacts of the tobacco duty announcements made in the Budget were published in the Budget document. In addition, HMRC’s annual report, published each July, sets out the tobacco products duty revenue raised in the previous year. Illicit market share is documented in HMRC’s annual tobacco tax gap estimates. The 2013-14 estimates are due to be published in autumn 2014. HMRC and Border Force’s work to combat the illicit trade is set out in the “Tackling tobacco smuggling” strategy, which was first published in 2000 and updated in 2006, 2008 and 2011. The Government are undertaking a joint review of the strategy, which we aim to publish later this year.
It is clear that the information requested by the amendment is already provided by the Government. I understand, however, the shared desire of the Committee to tackle the illicit tobacco trade and ensure that smuggling does not undermine the health and revenue benefits of duty increases. HMRC and Border Force have an effective strategy in place to tackle illicit activity and, as documented in the reports I have just referenced, we have seen a long-term decline in the illegal trade. The illicit market
has reduced from 22% to 9% for cigarettes and from 61% to 36% for hand-rolling tobacco since the launch of the first anti-fraud strategy. To further build on that success, the Government will consult on a package of measures to strengthen the response to tobacco smuggling, which will ensure that HMRC and Border Force continue to combat tobacco smuggling effectively.The hon. Member for Newcastle upon Tyne North mentioned the minimum excise tax. The Government have committed to consult on whether a minimum excise tax for tobacco—which would set a minimum duty rate for a packet of cigarettes—could help to improve public health. This could also be a useful tool to limit the availability of cheap tobacco, further helping to reduce the affordability of smoking.
Let me turn to some of the hon. Lady’s questions. On receipts and HMRC progress, receipts have been on a broadly upward trend in recent years. Receipts are forecast to increase every year up to and including 2018-19. Since the launch of the first anti-fraud strategy in 2000, the illicit market for cigarettes has been reduced from 22% to 9%. The Government continue to monitor tobacco receipts and developments in the tobacco market.
On the National Audit Office and Public Accounts Committee reports, HMRC has already implemented four of the five NAO recommendations and five of the PAC recommendations. We thank them for their work. On working with other agencies, HMRC works with a variety of agencies, including trading standards, to combat illicit trade. Where appropriate, HMRC works with the tobacco industry. HMRC also works collaboratively with public health groups, such as the north of England project, which was acknowledged in the NAO report. Such joint working is clearly important.
On anti-fraud and revenue protection, the Government announced in the Budget that we would consult on three tobacco anti-fraud and revenue protection areas. One relates to anti-forestalling restrictions and the framework convention on tobacco control protocol, which is a World Health Organisation agreement to tackle the illicit tobacco trade. It contains details of a track-and-trace system, but the tobacco products directive proposals go beyond what is required under the trade protocol. We need to see where the directive finally gets to.
I think I have answered the hon. Lady’s questions. The clause implements the tobacco duty rate increases of 2% above inflation and fits into the Government’s wider health agenda of reducing smoking prevalence. I therefore ask her to withdraw her amendment.
Catherine McKinnell: I thank the Minister for her response to my queries. We tabled the amendment to send a strong signal that we want to see the issue rising up the Government’s agenda, and we are reassured that she has work ongoing in this area. I therefore beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 71 ordered to stand part of the Bill.
The Chair: Clauses 72 to 74 have been considered by the Committee of the whole House.
Clause 75
VED rates for light passenger vehicles, light goods vehicles, motorcycles etc
Question proposed, That the clause stand part of the Bill.
The Chair: With this it will be convenient to discuss the following:
That schedule 14 be the Fourteenth schedule to the Bill.
That schedule 15 be the Fifteenth schedule to the Bill.
Catherine McKinnell: I have one or two queries to put to the Minister, and I will specify to which clause the queries relate as I go along.
On clauses 75, 76 and 77, according to the Office for Budget Responsibility’s March 2014 economic and fiscal outlook report, vehicle excise duty revenue is predicted to fall from £6.1 billion in 2013-14 to £5.4 billion in 2018-19. The last Labour Government rightly reformed the VED system, such that the rates paid now largely depend on CO
2
emissions. However, as greener, more carbon-efficient vehicles become the norm across the UK—which is obviously a welcome development—there are implications for VED as a future source of Government revenue. Will the Minister outline what projections the Treasury has made of the revenue likely to be raised by VED over the next decade and beyond, and by how much she anticipates it will decline? How is that figure kept under review?The relevant tax information and impact note indicates that clauses 78 and 79 will have a negligible Exchequer impact in 2014-15 and 2015-16, but this will increase to £5 million in 2016-17, £10 million in 2017-18 and £15 million in 2018-19. The cost of a systems change to revise the qualifying cut-off date for the exemption each year will be at least £40,000, which will be met by the Driver and Vehicle Licensing Agency. The note also states that in 2014-15 the measure
“will have an advantageous impact for the owners of around 10,000 classic vehicles…Every year thereafter, the number of classic vehicles will increase as additional cohorts of vehicles are included in the exemption. It is estimated that an additional 10,000 classic vehicles will be affected in each year of the scorecard. Most of these vehicles are assumed to be cars or vans giving annual savings in 2014-15 of £145 or £230, depending on engine size.”
At 30 September 2011, there were 162,734 cars and 152,836 other vehicles exempt from VED on grounds of age. The measure in clause 79 is described by the tax information and impact note as a “rolling exemption” for vehicles built more than 40 years ago, but the explanatory notes suggest that that will be legislated for in every Finance Bill. Will the Minister clarify that point? What administrative issues will owners of classic vehicles face? Will they be granted a lifelong VED exemption on their car’s 40th birthday or will they have to apply for the exemption on an annual basis?
The tax information and impact note states that clause 80 will have a positive Exchequer impact of £25 million a year between 2014-15 and 2017-18, but also that a cost of £2 million is expected for managing
and implementing changes to DVLA operational systems. Will the Minister provide more detail on the grants referenced in the tax information and impact note, which will apparently be applicable to those vehicles conforming to the Euro IV, V and VI standards until 31 December 2016? How will the system operate? How will the Government ensure that the system does not place too great an administrative burden on vehicle operators? Finally, will the Minister explain why the reduced VED rates available to less-polluting buses are also being phased out as a result of the introduction of the heavy goods vehicle road user levy? I must declare an interest, in that the excellent Smiles Engineering, which specialises in repowering buses to make them greener and more fuel efficient, is in my constituency.There is no tax information and impact note for the measures in clause 82 and the explanatory notes provide little detail, so will the Minister explain their impact, who they will affect, the thinking behind them and the cost to the Exchequer?
10.15 am
Clause 83 will make life a little more convenient and very slightly cheaper for millions of motorists in the UK, but will the Minister clarify the costings set out in the tax information and impact note, which suggests a total Exchequer impact of minus £60 million between 2014-15 and 2018-19? I appreciate that the DVLA estimates that it will cost £8 million to set up the new scheme—the scheme for payment of vehicle excise duty by direct debit, for those who are still following me—but surely it will result in a significant efficiency saving going forward. How will the DVLA ensure that everyone is aware that the scheme is available? What support will be provided to more vulnerable taxpayers, many of whom still instinctively distrust the direct debit and banking system in general?
We do not have any queries relating to clause 84, which deals with the definition of “revenue weight”. Clause 85 deals with vehicle excise and registration. Coming after numerous fairly technical clauses in this part, it introduces a change that will affect the majority of people in the UK—including, I suspect, Committee members in this room, although not my hon. Friend the Member for Gateshead. As announced in the autumn statement 2013, the clause signifies the end of the beloved tax disc, which has served as proof of payment since 1921, following the Roads Act 1920 and the Finance Act 1920. At that time, what we now know as vehicle excise duty was referred to as the road fund licence.
However, long gone are the days when it was part of a police officer’s duty to inspect cars for valid tax discs, particularly as the police and the DVLA now rely largely on the DVLA’s electronic vehicle register and tools such as automatic number plate recognition cameras to support vehicle excise duty compliance. As of 1 October 2014, no longer will the Del Boys of this world be able to put a “Tax disc in the post” sign on their windscreen. We continue to move away from paper-based records and towards electronic registration in every aspect of our daily lives.
The requirement for paper tax discs to be displayed in vehicles will be removed through amendments to the Road Vehicles (Registration and Licensing) Regulations 2002. When does the Minister expect the revised regulations to come before the House? The tax information and
impact note suggests that the abolition of the tax disc will benefit owners of vehicles used for business purposes by about £7 million a year on aggregate. How has that figure been reached?One key way in which people have renewed their paper tax disc has been over the counter at the post office. The tax information and impact note suggests that the measure will benefit the post office network through savings to the costs of storing, securing and transporting paper-based vehicle licences. However, there are also strong concerns that the move will have negative repercussions for our post offices. Can the Minister outline the Government’s assessment of the potential negative impacts of the change on the network, and what steps are being taken to mitigate them?
The tax information and impact note also suggests that the change will have a negligible or nil Exchequer impact between 2014-15 and 2018-19, but that it will have a fixed cost to the DVLA of between £3 million and £6 million for the ceasing of the tax disc and of £10 million for the amendment of the refund process—for example, when one’s car is stolen or sold. The ongoing savings to the DVLA are expected to be about £7 million a year, because it will no longer produce, issue and post the tax disc.
Can the Minister say a little more about the impact of this measure? What impact is it expected to have on reducing vehicle excise duty evasion? The latest VED evasion figures, published by the Department for Transport rather than HMRC, suggest that VED evasion decreased slightly between 2011 and 2013 and that the level has remained relatively low, with some minor fluctuations, since 2008. Although it is just 0.6% of the amount due, that still equated to about £35 million in 2013-14. The Minister no doubt expects that figure to decrease even further as a result of abolishing the paper tax disc.
Finally, on clause 87, the Department for Transport and the Vehicle and Operator Services Agency require information held by HMRC about HGVs in order to implement the HGV road users levy. The information required is held on the freight targeting system. HMRC agreed to provide the information to DFT and VOSA by creating a legal gateway in a statutory instrument, utilising powers contained in the HGV Road User Levy Act 2013. Because of an error, however, the 2013 Act did not allow for the creation of a criminal offence of wrongful disclosure of identifying information in relation to the HGV road user levy, so clause 87 rectifies the situation. We welcome the fact that that has been recognised and dealt with as the levy is introduced. The explanatory notes briefly mention how taxpayer confidentiality will be safeguarded in the light of the new information-sharing gateway. To reassure Committee members and members of the public who take an interest in the matter, will the Minister say something about how that will be assured?
Nicky Morgan: I thank the hon. Lady for her questions and points. I will try to deal with them all, but I am sure that she will let me know if anything is outstanding at the end. Clauses 75 to 85 introduce changes to vehicle excise duty for cars, vans, motorcycles, heavy goods vehicles and classic vehicles. These clauses also introduce significant changes to the way in which VED is administered by abolishing the paper tax disc and introducing a direct debit payment method for motorists to pay their tax.
Clause 75 makes changes to VED rates for cars, vans and motorcycles, with effect from 1 April 2014. The Government announced at Budget 2014 that duty rates for cars and motorcycles, and the main rate for vans, would increase in line with inflation from 1 April. As a result, duty rates for those vehicles have remained unchanged in real terms, helping to support families and businesses with their costs. Owners of cars that were first registered on or after 1 March 2001 pay duty based on the carbon dioxide emissions of those cars. About 95% of people with such cars will pay no more than £5 extra in 2014-15. Owners of the most polluting cars will pay, at most, £10 extra. Rates remain unchanged for the cleanest cars. Cars registered before 1 March 2001 will incur only a £5 increase in duty, as will vans. Motorcyclists will see an increase of no more than £2.
Let me turn to clauses 78 and 79. The Government believe that classic vehicles are an important part of the nation’s heritage, so the duty exemption is designed to support the maintenance and use of classic vehicles. At Budget 2013, we announced that we would extend the exemption cut-off date by one year to vehicles built before 1 January 1974, and at Budget 2014 the reintroduction of a rolling exemption on a 40-year basis was announced. Clause 78 extends the scope of the exemption to vehicles manufactured in 1973 and comes into effect from 1 April this year. Clause 79 extends the scope of the exemption by a further year to vehicles manufactured in 1974 and comes into effect on 1 April 2015. The Government are committed to legislating each year, as the hon. Member for Newcastle upon Tyne North has said, to extend the cut-off date of the exemption by one year to ensure the rolling 40-year exemption. In 2014-15, the exemption is worth £145 or £230, depending on the engine size of the vehicle. The Government estimate that some 10,000 owners of classic vehicles will benefit each year.
Clause 83 relates to direct debits. Currently, duty can be paid by cash, cheque and credit or debit cards. At Budget 2012 we announced that we would aim to develop a direct debit system for VED payments to allow families and businesses to spread their tax payments. The DVLA conducted a public survey in October 2013, in which approximately 70% of those surveyed expressed an interest in paying their duty by direct debit. At autumn statement 2013, the Government announced that they would introduce such a system from October this year. Clause 83 will allow the DVLA to collect duty via direct debit in a one-off annual payment, two six-monthly payments or 12 monthly payments if motorists wish to pay in that way. Motorists who buy a six-month duty licence currently pay a 10% surcharge, but in the direct debit scheme the surcharge will be halved to 5% when tax is paid by monthly or six-monthly direct debit.
Clause 85 deals with the abolition of the tax disc. Clause 85 and schedule 15 are the first stage in the legislative process that will remove the requirement for vehicle licences, trade licences and nil licences—as the hon. Member for Newcastle upon Tyne North put it, the “beloved tax disc”—to be displayed in vehicles from 1 October this year. Approximately 45 million tax discs are issued by the DVLA and the Post Office every year. Historically, they have provided a visual aid that demonstrates that vehicle excise duty has been paid, but they have become redundant over time. The DVLA and
the police now rely on the DVLA’s electronic vehicle register and use tools such as automatic number plate recognition cameras to ensure that duty has been paid. Those enforcement tools have helped to improve compliance, with non-payment of duty running at an historic low of 0.6% in 2013.The changes made by clause 85 and schedule 15 mean that from 1 October this year motorists will no longer receive a paper tax disc to fix to, and exhibit in, their vehicle as proof that duty has been paid on it. The change could provide businesses with administrative cost savings of about £7 million per year. In addition, it will provide the taxpayer with annual cost savings of about £7 million, as the DVLA will no longer have to produce, issue and post tax discs to motorists. The abolition of the tax disc is part of the Government’s wider digital strategy to move Government services to digital channels. The clause and the schedule pave the way for changes to be presented to Parliament later this year to remove the requirement to display a tax disc. The hon. Lady asked about the regulations, which we intend to lay in July. They are to be introduced under the negative parliamentary procedure and will come into force on 1 October this year.
Let me turn to the HGV duty rates restructure. Rates for buses and heavy goods vehicles under 12 tonnes continue to be frozen. UK and foreign goods vehicles of 12 tonnes or over are subject to the new HGV road user levy. Our aim is to achieve as complete a levy offset for UK hauliers as is practically possible. Clauses 76 and 77 introduce rate reductions to offset the levy, with new rates categories to align the UK tax system with the lowest tax rates permitted by pan-European agreement.
Clause 80 and the associated schedule 14 withdraw historic reduced pollution discounts to build room for the levy-offsetting rate reductions. The discounts are replaced by already legislated grant payments administered by the Department for Transport. For buses and goods vehicles outside the levy, reduced pollution discounts will be tapered off through the nine months from 1 April 2016 to 1 January 2017. That will remove the anomaly of, for example, a 1999 vehicle being awarded a discount, while an even lower-pollution 2007 vehicle is not. The proposal was shared with stakeholders during the Bill consultation, and I am glad to report that no concerns were raised.
Clause 81 ensures that UK hauliers can always pay the duty and levy together in a single transaction, including for combined transport vehicles that deliver goods for onward rail transport to Europe. We must keep the bi-annual levy equivalent to accumulative monthly payments made by foreign hauliers, so we are presenting a practical means of further delivering offsets for UK hauliers. Clause 82 therefore reduces bi-annual duty to counter the 20% extra in two bi-annual levy payments compared with an annual payment. Clause 84 further aligns the UK tax system with the lowest tax rates permitted by pan-European agreement by adopting the agreement’s weight thresholds. The change is carefully framed to avoid any real-world impact on UK hauliers’ day-to-day operations. It is another means of delivering as complete a levy offset for UK hauliers as is practically possible.
Let me turn to some of the hon. Lady’s questions. She asked about the changes to duty resulting from the previous Government’s change to charging less-polluting vehicles a lower rate of duty. Of course, in the end, that
will bring in less money because there are more low-pollution vehicles. The duty revenue raised is projected to fall by £1.5 billion in real terms by the end of the decade. As she will know, we keep all taxes under review. It is good that we have more lower-polluting vehicles on the roads, but that is clearly having an impact on the duty that will be taken, and that is something the Treasury, under any Government, would have to keep under review.On historic vehicles, owners will need to apply each year. We will keep the issue under review, but the idea is obviously to keep administrative requirements as free from burdens as possible and to make things as easy as possible. The rolling exemption is provided for in each year’s Finance Bill to provide legislative flexibility, just in case any further changes need to be made.
The DVLA is developing a communication plan to ensure that the public are aware of the availability of the direct debit scheme. Stakeholders are being used to help put the message out, and I am sure Members of Parliament could also do that to make sure our constituents are aware of the changes when they next pay their duty.
I have already mentioned that evasion fell to the historic low of 0.6% in 2013. There is a comprehensive package of measures to tackle unlicensed vehicles, ranging from reminder letters, fixed penalties, court prosecutions and, as a last resort, wheel-clamping and removal of the vehicle. I have already mentioned channels such as automatic number plate recognition that allow the DVLA to track those who have not paid duty.
10.30 am
I have mentioned the regulations coming into force and the £7 million savings. The administrative savings will include postage in relation to paperwork and new tax discs. The £7 million was arrived at after stakeholder engagement with the British Vehicle Rental and Leasing Association. The sum represents businesses no longer needing to re-post tax discs and the reduced cost of returning the disc for a refund.
The hon. Member for Newcastle upon Tyne North asked, with reference to clauses 76 and 77, how the grants for reduced pollution trucks would operate. HGVs over 12 tonnes with a recent reduced pollution certificate will receive a grant from the Department for Transport that equals the previous duty reduction for such vehicles. The grant will be made as part of the truck operator’s vehicle excise payment. The amount of vehicle excise due will be offset against the amount of grant paid to the truck operator, so that in effect the grant is issued with no burden to the operator.
Clauses 75 to 85 support motorists with the cost of living, while ensuring that they continue to make a fair contribution to the reduction of the deficit. They provide tax administration savings to businesses and make it administratively more convenient for millions of motorists to pay their duty and license their vehicle. The clauses provide fairness by delivering offsetting vehicle excise duty rate reductions for UK hauliers with the 1 April introduction of the HGV road user levy.
Clause 75 accordingly ordered to stand part of the Bill.
Clauses 76 to 80 ordered to stand part of the Bill.
Clauses 81 to 85 ordered to stand part of the Bill.
Clauses 86 and 87 ordered to stand part of the Bill.
Clause 88
Aggregates levy: removal of certain exemptions
Question proposed, That the clause stand part of the Bill.
The Chair: With this, it will be convenient to take clause 89 stand part.
Catherine McKinnell: Clause 88 suspends those exemptions, including exclusions and reliefs, from the aggregates levy that are subject to a state aid investigation by the European Commission. The exemptions are suspended as of 1 April 2014.
Clause 89, in anticipation of a positive outcome to the European Commission investigation, provides for secondary legislation to reinstate the exemptions, and even to allow for backdated repayments from HMRC to those who have paid additional levies.
The aggregates levy is a tax on the “commercial exploitation” in the UK of rock, sand and gravel—sand, gravel and rock that is dug from UK soil or dredged from the sea in UK waters. Spoil, waste, offcuts and by-products of certain processes are also “aggregate” and subject to the levy. There is one basic rate of levy—£2 per tonne— though lesser amounts incur a smaller levy; so half a tonne of aggregate, for example, incurs a £1 levy. Producers of aggregates in the UK must therefore register and report the quantity of material that they produce and sell to the Government.
The Finance Act 2001, which the previous Labour Government introduced, provided for certain exemptions from the levy. The tax information and impact note informs us that the European Commission at the time decided not to raise any objections to the aggregates levy and, specifically, the exemptions provided for. However, clause 89 is before us today because that decision was annulled by the European General Court on 7 March 2012, with the Commission subsequently carrying out a preliminary assessment of the levy with the aim of determining whether any objections on the grounds that certain exemptions constituted state aid should be raised.
In a written statement on 13 September last year the then Economic Secretary made it clear that the Government disagreed with the view that these exemptions give rise to state aid, and stated:
“The Government are therefore only taking steps to suspend the application of those elements of the levy that now form the subject matter of the formal investigation because they are obliged to do so under article 108(3) of the treaty on the functioning of the European Union.”—[Official Report, 13 September 2013; Vol. 567, c. 65WS.]
HMRC published an interim guidance note in March which aims to clarify what those changes mean for affected businesses. It also sets out exactly what elements, as of 1 April 2014, are now taxable under the aggregates levy. The tax information and impact note suggests these changes will yield an additional £20 million in Exchequer revenue in 2014-15, with absolutely no Exchequer
impact thereafter. The note also suggests that these measures will affect around 200 businesses and hints at potential additional financial costs for affected businesses.Could the Minister set out the estimated financial impact of these changes on the approximately 200 affected businesses? As for potential significant financial burdens to certain businesses, is the Minister aware of any significant instances where this may be the case, and can she elaborate on what kind of significant burden this will be for those businesses? Turning to the European Commission’s investigation, could the Minister update the Committee on what progress has been made so far? What information have the Government provided to the Commission and has the Commission, at least so far, been satisfied with the information provided? Finally, in relation to the possible outcomes of this investigation, when can we expect a final decision from the Commission? Are we looking at 12 months or potentially longer than that?
Following on from the suspension of levy exemptions, clause 89 provides for secondary legislation to be introduced to enable the Treasury to restore those exemptions, exclusions and reliefs. Critically, it can restore them retrospectively and before the secondary legislation is made. In other words, this will mean that tax paid as a result of the suspension of an exemption from 1 April 2014 until whenever these exemptions are restored—I should say, if they are restored—can be repaid to the person or business who accounted for it. These provisions will be made only following the conclusion of the Commission’s investigation, should the terms of the Commission’s final decision allow such backdated payments and, indeed, if the Commission is satisfied with the exemptions in the first place.
The explanatory notes point out that in order for such payment to happen, HMRC would need to be satisfied that the taxpayer would not be unjustly enriched as a result of receiving the repayment. It suggests that businesses may therefore think about keeping records to demonstrate that they would not gain financially from this repayment. The explanatory notes suggest this could be done, for example, by including a commitment in contracts to repay any amounts charged to their customers to cover all or part of the cost of the levy in the event that the taxpayer is repaid the tax. There does not appear to be a tax information and impact note for the measures contained in the clause, although they are referenced in the tax information and impact note for clause 88. That note, however, suggests a £20 million yield to the Government, yet the provisions in the clause suggest that the Government intend to repay any levy payments made as a result of aggregates losing their exemption. So one would expect a neutral outcome for Treasury on first glance.
It would be helpful if the Minister could provide a bit more clarity on the Government’s intentions on backdating levy repayments. Do they intend to repay businesses in full for any additional tax paid as a result of the suspension of certain exemptions? In which case, would the measures contained in clauses 88 and 89 not be broadly revenue neutral, perhaps having a negligible impact, at most, if the additional revenue yielded now is later going to be paid back?
Finally, the language surrounding these provisions in both the explanatory notes and tax information impact note seems very optimistic and somewhat presumptuous in anticipating the Commission in allowing the Government to once again restore these exemptions. In line with my previous queries, will the Minister explain this optimism that the Government will be able to restore all the suspended exemptions provided for in clause 88? Indeed, have they already had an indication from the Commission that this is the likely outcome?
Nicky Morgan: Clause 88, as we have heard, suspends certain exemptions, exclusions and reliefs from the aggregates levy that are the subject of a European Commission investigation. Clause 89 gives the Treasury the power to use a Treasury order to reinstate those same exemptions, exclusions and reliefs from the aggregates levy, should the conclusion of the European Commission state aid investigation allow.
I will give some background to the investigation before coming on to the detail of the clauses. On 7 March 2012 the European General Court annulled a 2002 decision by the Commission not to raise objections to the aggregates levy. Because of that judgment, the Commission carried out a preliminary assessment of the levy to decide whether to raise objections on the grounds that it potentially gave rise to state aid. On 31 July 2013 the Commission notified its decision to open a formal state aid investigation to determine whether some of the exemptions, exclusions and reliefs falling within the provisions of the clauses amount to state aid and, if so, whether they are allowable state aid.
The changes introduced by clause 88 make 24 different kinds of mineral—together with spoil, waste and other by-products from their extraction—taxable. In addition, material that is more than half, but not exclusively, the spoil, waste or other by-product of an industrial combustion process or the smelting or refining of metal is also made taxable. To reflect the Commission’s doubts about whether slate, shale, coal, lignite, clay and certain specified industrial minerals such as fluorspar and potash are ever used as aggregates, these materials become chargeable with levy only when they are commercially exploited for construction purposes. The use of clay or shale in the manufacture of ceramic construction products such as bricks and roof tiles, and the use of gypsum or anhydrite in the production of plaster, plasterboard or related products have never been regarded as aggregate uses and so, to ensure these uses continue not to be taxed, they become exempt processes. All these changes take effect from 1 April 2014. Clause 89 enables the Government to reinstate any or all of the suspended elements of the levy if, in concluding its investigation, the Commission decides that these elements are not state aid, or are allowable state aid.
On the expectation that the Commission will conclude its investigation during 2014-15 and find that none of the exemptions, exclusions or reliefs amount to state aid, the changes are forecast to result in a revenue yield of £20 million during this year only. The hon. Member for Newcastle upon Tyne North asked how the £20 million was calculated. A variety of data sources were used to establish the tax base for the measure, including mineral product association data derived from WRAP research carried out for the Department for Communities and Local Government, the Department for Business,
Innovation and Skills monthly bulletin and the annual minerals raised inquiry, also known as Business Monitor PA1007, published by the Office for National Statistics. Those data were used to estimate that around 7 million tonnes of aggregate would be brought into taxation through the suspension of the exemptions. The static costing was calculated by multiplying the tax base by the change from zero to £2 levy payable per tonne. An adjustment was also made to account for material expected to be used by the Environment Agency following the flooding in early 2014. The overall behavioural effect from suspending the exemptions was expected to have a negligible effect on the yield, and the yield was assumed to be zero in future years as we expect to reintroduce the exemptions in 2015-16. The Commission has indicated that it aims to conclude the investigation this autumn. In relation to the optimism, the Government have always maintained that none of the exemptions, exclusions and reliefs being investigated are state aid. We are very clear about that. My officials have been providing evidence to the Commission to support that view as part of a formal investigation process, and I sincerely hope the Commission will agree with our position.The changes are expected to directly affect around 200 businesses, which will incur some additional costs associated with registering, record-keeping and accounting for the tax. How did we arrive at 200 businesses? The British Geological Survey’s directory of mines and quarries provides details of mine and quarry operators, their sites and the minerals they extract. It was possible to estimate the number of businesses affected by the suspension from the details in the directory of operators dealing in the materials affected.
10.45 am
Those businesses may incur a significant financial burden if they are unable to pass on the cost of the levy fully to their customers. Businesses that commercially exploit slate for use as aggregate or commercially exploit the waste arising from ball clay and china clay are likely to be most affected by the suspensions. However, aggregate sales are ancillary for such businesses, so the burden should not be excessive.
Clause 89 provides for the suspended elements of the levy to be restored retrospectively if the Commission decision allows. HMRC will therefore be able to repay the tax paid as a result of the suspension, potentially putting effective businesses back in the position that they would have been in had the suspension not taken place. Using a Treasury order for this purpose will ensure that there is no delay in giving effect to the reinstatement, should the timing of the Commission decision not fit with the timetable for a future Finance Bill. As we have heard, the tax information and impact note estimates the cost at £20 million. We will need to wait for the Commission’s decision before we can look at the impacts or exactly how we will make repayments, but the idea will be to get the money back to businesses as quickly as possible.
My officials are co-operating fully with the Commission to expedite the conclusion of the investigation. While it continues, the Government have suspended those elements subject to the investigation only—I emphasise that—because they are obliged to do so under European law and only to the extent that the Commission has expressed doubts about them. Although it is impossible to say whether
any reinstatement of the exemptions will take place, it is important to act now to ensure that tax that is collected only because the Commission investigation obliges us to collect it can be repaid without delay should the conclusion of the investigation allow.Clause 88 accordingly ordered to stand part of the Bill.
Clause 89 ordered to stand part of the Bill.
Clause 90
Climate change levy: main rates for 2015-16
Question proposed, That the clause stand part of the Bill.
The Chair: With this it will be convenient to consider the following:
Amendment 25, in clause 92, page 84, line 16, at end insert—
‘(3) The section shall not come into force except as specified in subsection (2) below.
(1) The Chancellor of the Exchequer shall bring the section into force by order within six months of the passing of this Act.
(2) A statutory instrument containing an order under subsection (3) shall be accompanied by a report which details—
(a) the impact of the provisions in the section on consumers and on fuel poverty;
(b) the impact of the provisions in the section on energy-intensive industries and on employment in those industries;
(c) the level of carbon leakage in the energy-intensive industry as a result of the provisions in this section;
(d) the effect of the provisions in the section on investment in new renewable power generation and on investment in new nuclear power generation;
(e) any effective subsidy provided to, or additional profits accruing to, operators of existing and new nuclear power stations as a result of the provisions in the section;
(f) what additional package of measures will be enacted to mitigate the impact of the section on energy-intensive industries;
(g) the impact on business investment of—
(i) changes to Schedule 6 to the Finance Act 2000 made by Finance Act 2011;
(ii) changes to Schedule 6 to the Finance Act 2000 made by this Act.”
That schedule 16 be the Sixteenth schedule to the Bill.
Catherine McKinnell: Clause 90 is the first of four clauses making provision for the climate change levy. Introduced in 2001, the climate change levy is an environmental tax on energy supplies to industry, commerce, agriculture and public services; it does not apply to domestic energy supplies, businesses that use only a small amount of energy or charities engaged in non-commercial activities. It is aimed at promoting energy efficiency and the use of renewable energy so as to meet the UK’s international obligations under the Kyoto protocol and our domestic targets for cutting greenhouse gas emissions.
The climate change levy is made up of two components: the main rates and the carbon price support rates, otherwise known as the carbon price floor. Clause 90 deals with the main rates of CCL, while clauses 91 and 92 deal with the carbon price floor. I have much that I want to say about the climate change levy, specifically in relation to the carbon price floor; I will therefore reserve the majority of my comments for clause 92 and our amendment 25.
All rates of CCL are charged at a specific rate per unit of energy. For the main rate of CCL there are separate rates for electricity, natural gas, liquefied petroleum gas and solid fuels. As the explanatory notes point out, since 2007 it has been standard practice for those rates to increase in line with inflation to ensure that the levy maintains its environmental effect. Successive Finance Acts have therefore legislated for the following year’s inflationary increases; clause 91 continues in that vein by uprating the main rates of CCL in line with the retail prices index.
Clause 91 is the first of the clauses that deal with the carbon price support rates of the climate change levy, which is the mechanism that underpins the carbon price floor. As I have mentioned previously, there is quite a lot to discuss on the carbon price support rates. Clause 91 makes provisions for the third of the bands, coal and other taxable solid fuels, reducing the rates previously set for those fuels for the years 2014-15 and 2015-16. The CPS rates of CPL are legislated for two years in advance, based on a rate per tonne of carbon set that year by the Government. The explanatory note suggests that the purpose of the measure is to correct rates for coal and other solid fuels in the light of incorrect data, the rates having been set too high for 2014-15 and 2015-16. I should be grateful if the Minister elaborated further on that.
Where did the original data that are now deemed inaccurate come from? Have the updated figures come from the same data source? If so, can the Minister reassure Committee members that they are now accurate? Equally, if the CPF rates for the climate change levy for coal and other solid fuels were set too high in 2013-14, presumably electricity generators using such fuels paid a disproportionate amount of tax on their carbon emissions, compared with other types of electricity generators. Can the Minister confirm whether that is so? If so, will she provide further details about how much more, on average, such electricity generators paid in rates for CCL?
Finally, the tax information and impact note accompanying the measures, along with the policy costings document published alongside Budget 2014, referred to the Exchequer impact of all changes and reforms to the carbon price floor—those predominantly provided for in clause 92, which I will come to shortly. It would be helpful if the Minister set out the Exchequer impact, if any, of the measures in this clause. Considering that the carbon price support rates for coal and other solid fossil fuels have been reduced, presumably that will have a negative impact on Exchequer revenue. I should be grateful if the Minister clarified those points, which are not clear from the information that has been provided.
Clause 92 makes provision to reform the coalition Government’s carbon price floor. Before I come to our amendment 25 to clause 92, let me briefly outline the
provisions in the clause and some background to the carbon price floor. The carbon price floor combines two different rates or systems to reach the price per tonne of carbon: the EU emissions trading system and the headline carbon price support rate, a UK-only rate that we covered in the debate on the previous clause. The CPF rate per tonne of carbon provides a top-up to the EU ETS price, so that the cost per tonne of emitted carbon in the UK from the generation of electricity is no less than the rate specified by the carbon price floor.The coalition Government introduced the carbon price floor, along with the accompanying CPF rates to top-up the cost of carbon, in April 2013. The overall CPF rate was set at £4.94 per tonne of carbon in its first year. This year it is set at £9.55 per tonne of carbon, rising to £18.08 per tonne of carbon for 2015-16.
Nic Dakin: Does my hon. Friend share my surprise that the Government did not do their homework at that time to check how to ensure mitigation for high-energy users through the EU before rushing in with these carbon floor taxes?
Catherine McKinnell: I thank my hon. Friend for his intervention. He anticipates many points that I will make. He and I were not the only ones who were surprised; a wide variety of interested parties, including Ministers, were surprised, feeling that the tax was ill thought through. The explanatory notes on the clause set out the Government’s reasoning for the cap:
“Since the CPF was introduced the EU ETS carbon prices have fallen, meaning the gap between UK energy prices and energy prices abroad has grown and would continue to do so if the original CPF trajectory was maintained. The introduction of a cap on the UK-only element of the CPF is intended to limit the disparity between UK and non-UK energy costs.”
The Opposition made an observation on that when the carbon price floor was debated in the Finance Bill Committee in 2011, and that observation remains a key focus of our amendment 25. My hon. Friend the Member for Bristol East (Kerry McCarthy), in her role as shadow Economic Secretary at the time, made a number of observations in that year’s Finance Bill Committee, most of which, unfortunately—I genuinely mean that—appear to have finally been realised by this Government.
The Opposition moved an amendment to the Finance Bill in 2011 that sought a Government review of the impact of the carbon price floor on, in particular: energy bills and fuel poverty; manufacturing, heavy industry and employment in those industries; business investment; and investment in renewables. At the time, my hon. Friend pointed out that the carbon price floor would not do what Ministers promised, that manufacturing would be hit as a result and that we might not even reduce carbon emissions by a single tonne. None the less, the Government voted down the amendment, dismissed the Opposition’s concerns and labelled our amendment as unnecessary; yet three years later the Government are now having to U-turn on their original policy after acknowledging its damaging impact on Britain’s businesses and the worrying prospects for the future. Amendment 25 calls on the Government to conduct the review that they previously dismissed as unnecessary. Indeed, it builds on the amendment we moved in last year’s Finance Bill Committee, which called on the Government to review the impact of the carbon price floor on their emissions reduction commitments.
In response to my hon. Friend the Member for Scunthorpe, I have mentioned that it was not only Opposition Front Benchers who were raising those concerns. Our voice was one in a growing chorus calling on the Government at the very least to take stock of the carbon price floor and its impact on businesses, consumers and the green industry. Carbon market specialists have held the CPF up as one of the best examples of carbon leakage. Experts from the Institute for Public Policy Research labelled it
“not a green tax, it’s just a tax on business and households.”
Even Greenpeace spokespeople lamented the carbon price floor for giving green taxes “a bad name.”
The Chancellor and his colleagues may also be aware that criticisms of the carbon price floor have been heard much closer to home. For example, The Daily Telegraph reported that the right hon. Member for Sevenoaks (Michael Fallon), before becoming Minister of State, Department of Energy and Climate Change, thought the policy was ineffective, labelling it
“a fairly absurd waste of your money”.
He made those comments to a Telegraph reporter when he mistakenly thought that the policy had been inherited from the previous Labour Government. More recently, the Secretary of State for Business, Innovation and Skills has expressed his doubt about the carbon price floor. According to a Reuters report, he told an industry event in January hosted by Tata Steel:
“Energy-intensive industry has got special problems arising from British energy costs. The carbon price floor is pricing in a disadvantage to UK producers.”
Perhaps a result of those concerns is that the Government have finally chosen to act and make some welcome changes in this year’s Budget.
One of the Opposition’s key concerns about the carbon price floor is how it will affect, and has affected, British industry. The Chancellor told the House in his 2011 autumn statement:
“We are not going to save the planet by shutting down our steel mills, aluminium smelters and paper manufacturers. All we will be doing is exporting valuable jobs from this country”.—[Official Report, 29 November 2011; Vol. 536, c. 807.]
We wholeheartedly share those concerns. Indeed, the Select Committee on Energy and Climate Change pointed out that that is exactly what the carbon price floor would do.
Charlie Elphicke (Dover) (Con): Does that not make the case for carbon-free nuclear power ever stronger? Why did Labour not build any of those power stations?
Catherine McKinnell: It is outside the scope of this clause to get into a much wider debate about the energy mix we need in this country, although we have had that debate in relation to previous clauses. It is important not to brush over the key issues in relation to carbon price support. Indeed, our amendment calls on the Government to put proper thought into how they approach the matter. We called for such thought in 2011, 2012 and 2013, and here we are again, calling for proper consideration to be given to our industry. I appreciate that the hon. Gentleman has an interest in these issues, but I do not think they are particularly relevant to the clause.
In the 2011 autumn statement the Chancellor promised a £250 million compensation package for some energy-intensive industries, yet Ministers have recently confirmed to me in a written answer that so far no businesses have been compensated for the indirect costs of the carbon price floor, due to the scheme still requiring state aid clearance. I see that we do not have many swivel-eyed Members on the Government Benches today—most seem to be yawning, rather than eye-swivelling.
11 am
Chris Heaton-Harris (Daventry) (Con): I’m here!
Catherine McKinnell: Oh, the hon. Gentleman is here.
Nic Dakin: Not only have energy-intensive industries not received a penny of compensation for the carbon floor price; the Government cannot guarantee—although they are trying their best—that any compensation or mitigation that is forthcoming will be backdated to April 2013, when the costs began for our local businesses, which are competing in a very competitive market.
Catherine McKinnell: Indeed. Given the importance of the issue to so many businesses up and down the country, the responses that we are getting are quite disturbing. The Minister of State, Department of Energy and Climate Change, the right hon. Member for Sevenoaks, has repeatedly stated that he is “hopeful” that state aid clearance for the carbon price floor compensation scheme will be received “soon”. Indeed, he has been “hopeful” since as long ago as February, so can this Minister now confirm with greater certainty, which so many businesses desperately need, when exactly energy-intensive industries can expect to see their long-awaited compensation for the carbon price floor?
Also, the Minister of State has indicated in answer to parliamentary questions that even when the UK does receive state aid clearance—this point was raised by my hon. Friend the Member for Scunthorpe—that will not include clearance for backdated payments, so I would be grateful if this Minister confirmed whether the UK Government will continue to seek approval for that from the European Commission, and provide reassurance to affected businesses, which have been promised support but so far have not received any.
The Opposition have made it clear since the carbon price floor’s inception that any action to tackle carbon emissions must be taken at European level, not through the UK acting alone. Indeed, that is also the view of the Select Committee on Energy and Climate Change, which in a 2012 report says that only an EU-wide price for carbon emissions can be the way forward, pointing out that the UK acting on its own will have no impact on carbon emissions. This year’s Budget document suggests that the Government now agree with that view, emphasising the need to reform and strengthen the EU ETS.
I put similar questions to the then Economic Secretary to the Treasury in last year’s Finance Bill Committee, but I think that it is worth putting them again, as there may have been some development in the Government’s thinking. In the light of the view set out in the Budget document, can the Minister outline what steps the Government are taking to secure the necessary reforms
of the EU ETS? What conversations are she or other Ministers having with European Energy Ministers to strengthen the EU ETS? Can the Minister enlighten Committee members on how exactly the UK Government feel that the EU ETS can be reformed and strengthened to enable it effectively to reduce carbon emissions at European level, as opposed to action taken by the UK only? Does the Minister have any estimates of what the price of carbon under the EU ETS might look like around 2020? In other words, does she predict that the price of carbon will increase significantly under the EU ETS up to 2020, or does the UK Government anticipate that the EU ETS price will remain broadly where it is at present? Presumably those kinds of assessment are being undertaken by the Government and, obviously, long-term certainty for businesses affected by these prices is crucial for confidence to invest.The Opposition’s amendment 25 also calls on the Government to review the impact that the carbon price floor has had on energy bills and, by extension, consumers and the number of households pushed into fuel poverty as a result of the measures. That was another concern that was raised by the Opposition back in 2011 and dismissed at the time. The then shadow Economic Secretary highlighted the Government’s own estimates, which suggested that between 30,000 and 60,000 more households would fall into fuel poverty in 2013, rising to between 50,000 and 90,000 more households by 2020, as a direct result of the carbon price floor.
Official fuel poverty figures are only as recent as 2011. Under the original fuel poverty definition, 4.5 million households were in fuel poverty in that year. However, the latest report from the Energy Bill Revolution estimates that that figure rose to 5.8 million in 2013 and that currently 6.6 million households are in fuel poverty. That is almost 2 million more households in fuel poverty in three years—a rise of 49%. Most worrying of all, 1.4 million of those households are families with children.
Clearly, a range of factors lie behind the rise, not least a £300 increase in energy bills for households since 2010, but it is critical for the Government to understand what impact their own policies, such as the carbon price floor, have had on energy prices and fuel poverty. Will the Minister confirm to the Committee what estimates the Government have made of the number of households pushed into fuel poverty as a result of the carbon price floor?
I recently visited an energy-intensive company in the north-east, on Teesside, where one of the largest integrated process industry clusters in Europe is located. I came away from that visit with some clear messages, reflective of the wider energy-intensive industries in the UK. First, the coalition Government’s lack of clarity and long-term certainty on energy policy has been particularly damaging for business investment. Secondly, certain industries, such as those on Teesside, by the very nature of their work and their industry will remain heavily reliant on less clean fuels. Such industries need heat, often on substantial scales, but those issues seem to have been overlooked by the coalition Government when formulating policies such as the carbon price floor.
It is welcome that the Government recognised in the recent Budget that the utilisation of combined heat and power systems—now used by many in the energy-intensive
industries—is effective in terms of cost and carbon reduction. The Budget announcement that fuels used to generate good-quality electricity by CHP plants for on-site purposes will be exempt from the carbon price floor is welcome, although the exemption will not be acted upon until April 2015.None the less, Opposition amendment 25 calls on the Government to conduct a thorough review of the impact of their carbon price floor across a range of different areas. The Opposition expressed a number of concerns in 2011, with the first legislation, but the Government dismissed them at the time. Now, unfortunately, they appear to have been realised. I urge all Committee members, who I know take the issue seriously and care a lot about the affected businesses, to support our amendment. The exercise that we are calling for would give better understanding of what changes can now be made to put consumers, businesses and Britain in a much stronger position on energy policy.
The finalised measures in clause 93 and the schedule to it, following a consultation last year and a second one as part of the published draft Finance Bill, and according to my understanding of the tax information and impact note, differ from the earlier proposals in two ways. First, there is guidance on the impact of the new exemptions on those businesses or industries that are signed up either to the climate change agreement or to the carbon reduction commitment schemes, for example, but what happens to businesses that are no longer required to sign up to such schemes as a result of becoming wholly or partly exempt from the climate change levy?
Secondly, there are minor changes to the scope of the metallurgical and mineralogical exemptions, most notably the addition of sheet metal pressing as an eligible metallurgical process. The measures, however, appear to be the result of concerns that the climate change levy, as it previously applied to those sectors—both energy-intensive industries—significantly harmed their international competitiveness. Indeed, the tax information and impact note appears to bear that out. When the exemptions were first announced in Budget 2013, British Glass welcomed the changes, pointing out the competitive disadvantage to the granite, cement and glass sectors as a result of the climate change levy.
We have already discussed at great length under clause 92 the impacts of the climate change levy on British industry, and I do not seek to replay them in relation to clause 93. It would be helpful, however, for the Minister to respond to a few outstanding queries. Considering that the tax information and impact note suggests that the measures will bring UK tax treatment for metallurgical and mineralogical industrial processes in line with those throughout Europe, will the Minister outline how many other EU countries already have such measures in place? Will the Minister set out how long such exemptions have been in place in other parts of Europe, and why? If the EU legislation allowed for such exemptions, why are the Government only now implementing them?
Has the Minister made any assessment of the impact of the competition distortions, as outlined in the tax information and impact note, on British businesses involved in metallurgical and mineralogical processes? It is, of course, welcome that the UK Government are now providing for the exemptions. The tax information and impact note merely states that these measures will
“improve the international competitiveness of firms in the metallurgical and mineralogical sectors”.
However, I am interested to hear what estimate, if any, the Government have made of the average financial benefit to affected industries as a result of these exemptions. Presumably, that work has been done and it would be useful for the Committee to hear the Government’s thinking.
Nic Dakin: I have to speak on this issue because of the direct impact of the carbon floor price on steel, the major industry in my constituency. The provisions are welcome moves in the right direction, as my hon. Friend outlined. The real issue is that none of us wants this to be too little, too late. That is the danger of where we lie with this self-inflicted wound by the coalition Government in relation to the carbon floor tax. They unilaterally introduced it without doing the proper homework on putting appropriate mitigations in place through the European Union.
It is amazing that the Government managed to come up with a tax that united the green lobby—Greenpeace, Friends of the Earth and others—and foundation industries such as glass, steel and chemicals in saying that this was a poor tax. To have achieved that is a work of genius. The tax is flawed at its kernel. We now have an attempt to row back that does not do anything, in the Government’s prospect, until April 2016 when a freeze will be put in place.
There is a danger of the rhetoric around this sounding as though it is doing something when it actually does nothing at all. Foundation industries need action now to ensure that they can continue to play their important role in the country’s wealth creation. As my hon. Friend indicated, we have international investors, often based outside the UK, such as Tata, making decisions about investment in our industries. The uncompetitive nature of energy prices is one of those marginal issues that, if not tackled, can make the difference between investing and not investing. That would not be good for anybody.
The other irony is that, as the Chancellor observed, if UK industry is made uncompetitive through self-inflicted wounds, all that happens is that carbon leakage is exported elsewhere. Places such as Ukraine end up as the steelmakers and release far more carbon into the environment than our highly efficient plants do at the moment. That has all the ingredients of the economics of the madhouse.
Christopher Pincher (Tamworth) (Con): I take on board the hon. Gentleman’s point about carbon leakage. Is he therefore suggesting that it would be politic for the Government to switch from measuring carbon emissions by production to measuring them by consumption?
Nic Dakin: That is a technical area that the Government need to look at. The hon. Gentleman makes a good point in raising how the measures are achieved. That also illustrates that it is an area where we must have global agreement to take it forward. That means that sometimes steps are slower than they need to be to address the massive challenge of climate change.
Karl-Ulrich Köhler, chief executive of Tata Steel Europe, commented after the Finance Act 2011 introduced the carbon floor tax. His analysis is that energy bills for
foundation industry businesses in the UK are 50% higher than for equivalent businesses elsewhere—he runs equivalent businesses in France, Germany and the Netherlands, so he has illustrative data from his own business portfolio. In essence, that is the equivalent of an extra £5 per tonne of steel manufactured in the UK, compared with elsewhere in Europe, which equates to about 2,000 jobs, if labour costs must be reduced to manage the energy margin of difference. Therefore, it is significant to UK foundation industries.11.15 am
I welcome the fact that the Business Secretary and others have committed to putting their shoulders to the wheel to ensure that our foundation industries can perform. In April 2014, I asked the Minister of State, Department of Energy and Climate Change, the right hon. Member for Sevenoaks—an excellent Minister who strives to do his very best—to ensure the mitigation for the carbon floor price that the Government are striving to get through Europe is backdated to April 2013. He said he would do his best, but he could not guarantee it. That is not good enough. Our foundation industries deserve the support that Members of all parties promise in their rhetoric. Those industries need more than rhetoric; they need action.
My worry is that the coalition Government, with their self-inflicted wound of the carbon floor tax—they can blame nobody else for it—cannot box themselves out of their corner. They ought to be doing something now; 2016 is better than nothing, but they may not be in government in 2016. That is a long way away for the people toiling in the steel, glass and chemicals industries who create this country’s wealth. We need those people for the future.
I know we set up review after review, but I welcome the tenor of amendment 25, which aims to keep this under wraps. We should try to do whatever we can to drive this issue forward by reviewing the impact on leakage of jobs in the UK. None of us wants what we fear might happen if we do not act appropriately and urgently.
Chris Heaton-Harris: It is a pleasure to serve under your chairmanship, Mr Caton. I want to follow on from the hon. Gentleman’s comments. I have been monitoring energy costs in the United Kingdom for a long time, and I am fascinated by the various carbon taxes, including the carbon floor price, and by the way Tata Steel goes about its business. It is a remarkably fluid global enterprise that can choose where it goes in the global market.
The hon. Gentleman mentioned Karl-Ulrich Köhler, the chief executive of Tata Steel Europe, and I have a quote of his that I carry around as a reminder. After Tata Steel announced a number of redundancies in its Port Talbot works, he said:
“European steel demand this year is expected to be only two-thirds of pre-crisis levels after falls in the last two years”—
he is talking about the problem with the economy. He continued:
“On top of the challenging economic conditions, rules covering energy and the environment in Europe and the UK threaten to impose huge additional costs.”
The dilemma for him personally and for us all is that nearly all parties are committed to decarbonising the economy. The carbon floor prices and the carbon taxes
associated with them are one of the methods for doing that. However, the consequence of doing that does not look good for energy-intensive users.I do not see the point in a review. Our direction of travel seems perfectly logical, and I think people are beginning to recognise the issue now. There needs to be a more sensible conversation. If we want to retain a strong and well-founded—forgive the pun—steel industry in this country, as well as all the other heavy industry companies that use lots and lots of energy and employ thousands upon thousands of people across the midlands and across the country, we need to have a very sensible conversation about energy provision, carbon floor prices and carbon levies.
Ian Swales: I feel I ought to rise to say a few words since my constituency is heavily affected by the debate we are having now. It is mainly my constituency that the shadow Minister was referring to regarding her visit to Teesside. In my constituency, we have a huge steel industry. We have Tata, SSI—a Thai company—and the UK’s biggest chemical site, so I see the issues writ very large. In addition to all the points already made, all of which I agree with, we need to talk about complexity.
Businesses in my constituency talk about having seven different forms of taxation or measures regarding the energy that they use. Merely navigating that minefield is one of the problems that they speak about. They have issues, not to do with this House, but regarding changes taking place in Europe around reductions in the emissions trading system, which are beating on them, but obviously beating on other industries around Europe. It is vital that we keep a close eye on this and make sure that
UK-based industries are not at a disadvantage. We must not believe all the headline energy prices that are published, because, as Tata and others know, the prices they pay are not always the ones that seem to be in the press.I know the Energy Minister was quite shocked when he visited Germany, and it affected his view when he found out what the real market was for industrial energy in Germany, as opposed to the average prices that we might see published in the press. For example, industry in Germany pays far lower prices than domestic consumers pay, so that area definitely needs to be under review. The Government need to take a wider view of their income stream, because one thing that has not been mentioned is that for all the taxes they get from energy, there are also lots of taxes from employment, from businesses, and from profits and so on, and if we drive businesses out of this country, they clearly will be lost.
Finally, energy-intensive industries have a vested interest in reducing energy costs. They already pay a lot for their energy. They are being beaten with five or six sticks already. There is a limit to how many sticks they need to be beaten with before they look at how much energy they use and how much carbon they generate. Many industries, such as ammonium nitrate manufacturers, are inherently energy intensive. There is nothing we can do—it is all about chemistry and physics—so we need to make sure that the Government show that they welcome such businesses and put policies in place to ensure that they stay here and thrive.
Ordered, That the debate be now adjourned.—(Amber Rudd.)
11.23 am
Adjourned till this day at Two o’clock.