Her Majesty’s Revenue and Customs (Nurseries)

David Gauke Excerpts

Monday 15th October 2012 Commons Chamber

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

I start by congratulating the hon. Member for East Kilbride, Strathaven and Lesmahagow (Mr McCann) on securing this debate and acknowledging his efforts to pursue this issue on behalf of his constituents. I know of the equally determined efforts of my hon. Friend the Member for Cardiff North (Jonathan Evans) to represent his constituents, and I also acknowledge the other hon. Members who contributed this evening.

As we are all aware, HMRC’s core purpose is to collect tax and distribute benefits. That is what it was set up to do and where its efforts and resources need to go. Of course, it also has a duty to be a responsible employer to its staff, and I appreciate that the decision to close eight on-site nurseries has been controversial, but this provides an example of the difficult balance that public services often need to strike between their public obligations and their responsibilities to their own staff.

As alluded to by the hon. Member for East Kilbride, Strathaven and Lesmahagow, I am not responsible for the day-to-day management decisions of HMRC, which is a non-ministerial Department, but I am the Minister to whom it is accountable for its core duties, which is why I am responding tonight. For the record, I think that HMRC’s management decision was broadly the right one, although I agree that its execution of that decision could have been better handled and has caused regrettable upset and uncertainty among the parents of the children in the eight nurseries.

The hon. Member for East Kilbride, Strathaven and Lesmahagow, my hon. Friend the Member for Cardiff North and other hon. Members have made several important points, and I will deal with them, but it is important to understand why HMRC made the decision it made. As I understand it, the on-site nurseries were originally set up in a small number of locations where Her Majesty’s Customs and Excise and the Inland Revenue were experiencing recruitment difficulties among younger workers. The nurseries helped them to attract and retain parents of young children, at a time when there was no other provision for child care in HMRC’s legacy organisations.

Over the years, the number of these nurseries has declined, and across the eight nurseries that we are discussing, which are run by the private nursery provider, Bright Horizons, there has been a decline in both the take-up of places overall and in the proportion of places used by HMRC staff—I shall return to that point later. In fact, across all eight nurseries, only just over one third of places are currently taken up by HMRC employees. I recognise, however, that this was not the case in East Kilbride and Cardiff, where more than half the spaces were taken up by the children of HMRC staff, as was also the case with the Nottingham site.

HMRC made an operational decision, however, to end and not re-tender the contract for these nurseries, for perfectly understandable reasons. First, in line with Government objectives, HMRC’s estates strategy is to reduce the size of its footprint and either to hand back unwanted space to its landlord or to make more productive use of the estate that it retains.

[Mr McCann]

Will the Minister explain why it is Government policy to waste taxpayers’ money by giving up space that they would then have to continue to pay rent on and leaving custom-built nurseries lying empty when they can be utilised by staff?

[Mr Gauke]

The hon. Gentleman rightly said that we had a meeting about this matter; indeed, Lin Homer was present for that meeting. He should therefore be aware that Lin Homer repeatedly said that it was possible that the site in East Kilbride could be used for other purposes before 2015.

[Mr McCann]

That is not true.

[Mr Gauke]

That is what the hon. Gentleman was told repeatedly in that meeting, but if he is accusing me of saying an untruth or saying that Lin Homer did not say that, I would be grateful to hear it.

[Mr McCann]

I will be absolutely clear: I have given the Minister evidence that I have been given completely misleading information by civil servants in HMRC that was not true from day one. I am further saying to him that the space in East Kilbride will be empty until 2015. That was confirmed to me in a telephone conversation by the chief executive, Lin Homer, on 21 September.

[Mr Gauke]

We are talking about a somewhat hypothetical situation because, as the hon. Gentleman well knows, the site will remain used as a nursery. However, I have to tell him that Lin Homer corrected him on a number of occasions in the meeting we had. She did not say that the site was not going to be used until 2015; what she said was that there were no immediate plans for reuse, although she was not ruling out reuse of the site before 2015, which is a fairly substantial distinction. That is what the hon. Gentleman was told. If he did not understand it, that is regrettable, but that is what he was told repeatedly in that meeting.

To continue, in the 18 months to October 2012, HMRC closed 140 buildings and rationalised a further 44. That has resulted in nearly £47 million of savings annually and reduced HMRC’s estate by around 193,000 square metres—about 16% of its total estate over that period. The spaces left when the nurseries close will be used for HMRC’s core purpose. Retaining space for on-site nurseries simply does not fit into that strategy.

Secondly, given the low nursery occupancy by HMRC staff, the justification for HMRC retaining the eight nurseries is no longer as strong as it was. That is particularly true now that HMRC, like other public sector employers, provides child care vouchers to all eligible staff, which they can use to pay for child care in any nursery they choose. The vouchers cover staff in more than 300 HMRC offices, which is far more than the eight affected by the closure of the nurseries. In making the decision not to re-tender the contract with Bright Horizons, HMRC researched the local areas and was confident that other nurseries had spaces at prices comparable to, and often lower than, those for the places in the Bright Horizons nurseries.

Thirdly, and most importantly in my view, HMRC was providing space to the private sector nursery provider free of both rent and utility bills. I do not believe it is sustainable for a Department, in effect, to provide a direct subsidy to a profitable private company. During these times of austerity, public bodies have a duty to make more productive use of the resources that they are paying for. I believe that HMRC’s decision was the right and responsible one, but I also think it could have gone about it better.

We have heard the criticism that HMRC did not provide sufficient notice to parents. I agree that more notice would have been preferable, but HMRC was honouring the contract between the estates provider and Bright Horizons, and the contracts between Bright Horizons and the parents, which were for three months’ notice. HMRC, in effect, gave Bright Horizons six months’ warning that the contract would end in November 2012, but Bright Horizons chose not to tell parents earlier than the three months’ notice provided for in their contracts. HMRC could have told its own parents earlier, but it might then have been liable for compensation claims from Bright Horizons.

The hon. Member for East Kilbride, Strathaven and Lesmahagow has made public statements to the effect that HMRC deliberately gave short notice in order to curtail debate. That allegation is inaccurate and unfair. HMRC was, as hon. Members would expect of a public body, seeking to honour the terms of legal contracts. It is also important to observe that Bright Horizons was given time to seek alternative accommodation for its nurseries, but that it made a commercial decision not to relocate and instead to close these eight nurseries. That was not HMRC’s decision: it was down to Bright Horizons. However, it is perfectly understandable, bearing in mind that it would have needed to pay market rent for other properties and that the take-up of places was, I understand, declining.

We have heard questions about why HMRC did not extend the contracts for another year or two, or at least extend contracts in the nurseries with high HMRC occupancy. This was a single contract for all eight nurseries, so it was not possible, within the contract, to extend any individual nursery alone. It was a question of all or none. Also, at the time that the decision was taken, HMRC honestly believed that the contract could not be extended. This was not a contract directly with HMRC, but one between Bright Horizons and HMRC’s landlord, Mapeley. HMRC was not party to all the details. In fact, it later transpired that HMRC’s original belief was incorrect, and that the contract could have been extended by another year for all eight nurseries. But, in any event, at no point did Bright Horizons ask for an extension to the contract, when HMRC opened discussions with it in May 2012.

It is highly regrettable that HMRC did not have all the correct information, but that does not alter the reasons for it wanting to end the on-site nursery provision. Nor does it mean, as the hon. Member for East Kilbride, Strathaven and Lesmahagow has alleged, that a senior HMRC official deliberately misled him. I simply do not see any evidence to support that allegation.

[Mr McCann]

Time is evaporating fast, and I do not want the Minister to finish without having time to answer my direct questions. However, on the point that he has just made, I was provided with reasons on 5 September by Mike Falvey, the chief people officer, yet when I spoke to Lin Homer on 21 September, a completely different reason was given. Can the Minister explain that? Will he also answer the two questions that I put to him in my speech?

[Mr Gauke]

Let me make as much progress as possible. I believe that the letter that the hon. Gentleman received in early September was based on a genuine understanding by HMRC of what the situation was. It related to a contract between Mapeley and Bright Horizons. In his subsequent conversation with the chief executive of HMRC, however, she set out more fully the context and the reasons for making the decision.

I want to turn to the hon. Gentleman’s suggestion that HMRC cannot reuse the nursery space for any other purpose. That is simply not correct. What HMRC cannot and should not do is commit, long term, to giving part of its estate over to nursery provision when it needs the flexibility to use that estate for its core purpose, and when it cannot do that, to negotiate giving it back to its landlord.

Things have moved on since this Adjournment debate was granted, and I think that HMRC has reached a better outcome. It has shown itself to be responsive to staff concerns and to the representations from the hon. Member for East Kilbride, Strathaven and Lesmahagow and my hon. Friend the Member for Cardiff North. When staff asked HMRC to consider transitional support, it swiftly put a package of such support in place, including some short-term financial relief for parents facing higher nursery costs and flexible working arrangements to allow parents to search for and settle their children into a new nursery.

HMRC also reopened discussions with Bright Horizons and asked it to consider whether it would enter into a different commercial arrangement at the three nurseries at which HMRC staff accounted for at least half of nursery places, under new contracts. I am pleased that Bright Horizons has agreed to a new and separate temporary lease in East Kilbride and in Cardiff, but it has made it clear that it does not see a commercial case for the third site, in Nottingham. The new lease for East Kilbride and Cardiff will run until August 2015, at which point Bright Horizons would need to relocate the nurseries if it wished to continue. HMRC will not end the lease before that time, although Bright Horizons will be able to close or relocate the nurseries at any point before August 2015, provided that it gives HMRC four months’ notice. That is more than the customary three months’ notice.

I know that this arrangement does not cover all the sites affected, but I believe that it is a sensible outcome. It provides a reasonable package of support for parents affected at all eight nursery sites, and two and a half years’ more nursery provision at Cardiff and East Kilbride. The long-term outcome is the same—

Tax Policy Consultation and Draft Legislation

David Gauke Excerpts

Tuesday 18th September 2012 Written Statements

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

The Government’s approach to tax policy making places great emphasis on policy consultation and scrutiny of legislation.

Over the summer, HM Treasury and HM Revenue and Customs have been seeking the views of interested parties on over 35 of the tax policies announced at Budget 2012. Responses to these consultations will be published on or by 11 December 2012.

As part of the next stage of consultation, draft legislation for these measures, to be included in Finance Bill 2013, will also be published on that date. This will be supplemented by draft explanatory notes and tax information and impact notes. The draft clauses will be open for consultation until 6 February 2013.

Tax Avoidance and Evasion

David Gauke Excerpts

Thursday 13th September 2012 Commons Chamber

[Mr Meacher]

I got it from the same source. I thought that the figure for 2008-09 was £42 billion. I shall write to the hon. Gentleman later. The average over the period is, I think, £38 billion and I am sure that the level reached £42 billion.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

To be helpful, I should say that I think the right hon. Gentleman is citing the 2008-09 number, while my hon. Friend is citing the 2009-10 number.

[Mr Meacher]

I thank the Minister for that helpful intervention. Once again, I find myself at one with the hon. Member for Wycombe (Steve Baker).

The haemorrhaging of tax revenues on the scale that I have described matters a great deal. First, and obviously, it is deeply unjust because tax avoidance and evasion are heavily concentrated among the big corporations and the mega-rich. If they pay hugely less than their real liabilities, that must mean that, for any given expenditure, those on average and low incomes have to pay more. That is always unjust, but it is particularly unjust at a time of prolonged austerity.

Secondly, there is the obvious point that if tax avoidance were cut sharply, many of the Government’s cuts in public spending and benefits would not be necessary and, I think, could not be justified. Thirdly, the tax avoidance industry—I do not exaggerate in saying that it is a parasite on the body politic—would be rendered largely obsolete.

The fact that City lawyers and accountants are paid vast sums to get round and neutralise what Parliament plainly intended in its Finance Bills is an open sore that would infect any democratic and fair society. The fact that they are allowed to do it makes monkeys of the Government. The fourth, and very important, point is that if most tax avoidance were stopped—I realise that it will never stop completely—companies would be forced to compete not on the basis of who was best at abusing tax law but on the quality of their goods and services. The benefit for the British economy would be substantial.

What has been the Government’s response? Tomorrow is the last day of the Government’s consultation on what they call their general anti-abuse rule, or GAAR, for tax. The background to that repays some examination. The Government commissioned the Aaronson group—Graham Aaronson is a prominent lawyer—to advise on the construction of such a rule. The group reported last November, I think. Extraordinarily, the report states right at the start that a broad anti-tax-avoidance rule is not necessary or desirable; it should apply only in the most extreme cases, so that for the overwhelming majority of cases circumventing taxes should continue as before.

I should point out that Aaronson has only ever represented companies or persons against HMRC; he has always acted pro the tax avoidance industry and never pro tax. Appointing him is rather like putting a poacher in charge of the grouse moors. Aaronson chose as his adviser Lord Hoffman, the man who killed the Ramsay principle—the general anti-tax-avoidance principle, or GANTIP—in the Westmoreland Investments case in 2001. The Government’s two key advisers on anti-tax-avoidance measures were carefully chosen in the sure knowledge that they would never recommend any such action. Thus, of course, it has proved. The Aaronson report recommended that if a general anti-abuse rule were accepted at all, Her Majesty’s Revenue and Customs should be obliged to consult and get the approval of a tribunal before it could be used against any particular person or company. In other words, the Government’s official tax collection agency should have to get permission from an external body before it could exercise its legal powers. That is an extraordinary proposal. However, it gets worse. The Aaronson group proposed that the tribunal should have three members—fair enough—of whom two should be from the tax avoidance industry. That makes it an open and shut case: the general anti-abuse rule will certainly gather dust on the shelf.

--- Later in debate ---

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to respond to this debate, and I begin by congratulating the right hon. Member for Oldham West and Royton (Mr Meacher) on securing it. This has been a broad and wide-ranging debate, and over the past couple of hours we have discussed the taxation of large businesses and wealthy individuals, taxpayer confidentiality, HMRC staff numbers, a general anti-avoidance rule, and the right hon. Gentleman’s private Member’s Bill, which I am sure the House looks forward to debating tomorrow.

Tax simplification was raised by my hon. Friends the Members for Amber Valley (Nigel Mills) and for Wycombe (Steve Baker), and my hon. Friend the Member for Portsmouth North (Penny Mordaunt) discussed standards of service in HMRC. My hon. Friend the Member for Bristol West (Stephen Williams) raised the topical matter of cash in hand, and perhaps went even further than I did earlier this year in his remarks about negotiating a discount for cash. I suspect all those matters could have filled a two-hour debate in themselves, but let me attempt to address as many of them—and others raised in the debate—as I can.

My first point is that the Government have a strong track record in addressing the full range of avoidance and evasion that results in the tax gap—the difference between the tax that is collected and the tax that is due. We remain further committed to tackling the gap and to reducing that sum over the course of this Parliament. Our intention is that the compliance yield of £13 billion a year, which we inherited, will increase to £20 billion a year in this Parliament.

It is helpful to distinguish between tax evasion and tax avoidance. A number of hon. Members have done so in the debate, but let me underline the point. Put simply, tax avoidance is the reduction of tax liabilities by using tax law to get an advantage that Parliament never intended. As we have heard—not least from my hon. Friend the Member for Bristol West, who brings expertise to these matters—tax evasion is illegally understating tax liabilities. Evasion is fraud and means breaking the law. There is striking unanimity in the House on the need to address both avoidance and evasion, and that the Government should take them seriously. I shall discuss the different responses we have in place for each, and the new directions on tax avoidance that we are considering through consultation.

I should first like to set out a few facts on compliance generally. Last year, HMRC collected £474 billion in tax. The tax gap for the last year for which authoritative numbers were produced—2009-10—was £35 billion. Of that figure, tax avoidance constitutes around 14%, which is down from 17.5% in 2007-08. The tax gap arising from tax evasion is also falling—from 17.5% in 2007-08 to 12% in 2009-10.

I would make two observations on that, the first of which was made by a number of right hon. and hon. Members, namely that the vast majority of UK taxpayers do not avoid or evade tax. The vast majority of taxpayers and our constituents expect us to ensure that as many people as possible pay the right amount in tax. Secondly, although by international standards our tax gap is low, the Government are determined to do everything we can to improve those numbers. That is why we are re-investing more than £900 million to transform the approach to compliance, to close the tax gap, and to enable HMRC to address the serious matters it faces.

The investment is funding a range of measures to widen HMRC’s overall compliance coverage and target the highest risks. It also includes funding for a highly skilled work force. We are increasing the number of staff working on compliance by around 2,500 full-time equivalent positions by 2014-15. Reference has been made to the Public Accounts Committee report that highlights concerns that cuts in the number of compliance staff resulted in revenue in the order of £1.1 billion not being collected in the previous Parliament. Hon. Members are correct that the number of HMRC staff will fall in this Parliament, but the number of those focusing on compliance activities will increase. There will, for example, be more criminal investigators and people working in intelligence to tackle tax evasion and avoidance.

[Margaret Hodge]

I accept that it is the intention of the Exchequer Secretary to increase compliance activity, but I would like him to address two issues that I raised: first, the fact that HMRC has raised the threshold for taking action on fraud, as a result of which less money will be collected; and secondly that, although he said we needed more highly trained individuals, such training is not taking place, because of the Department’s inability to establish training provision and ensure that people benefit from it and get on with it.

[Mr Gauke]

I do not accept the right hon. Lady’s point about the increase in the fraud threshold. When I look at some of the work that HMRC is doing—for example, to address inheritance tax fraud—I see a substantial increase in activity. It is addressing far more cases than ever.

I know that the PAC takes a strong interest in training. It is important that staff are trained. People are being moved from other parts of HMRC—for example, from personal tax—into enforcement and compliance. It is important that they are properly trained, however, and that process is going on—progress is being made and the compliance yield is already increasing. Over the months and years ahead, we will increasingly see the benefits of a large and better-trained compliance team. It is absolutely right that the PAC scrutinises this specific point, but HMRC is making progress, and we all want to encourage it to make further and faster progress to ensure that we get the right staff in the right places.

Compliance revenue has more than doubled in six years, and HMRC is on track to bring in about £7 billion in additional tax each year by 2014-15. In addition, on avoidance, HMRC has closed down seven schemes in the past year alone and, since 2010, litigated about 30 direct avoidance cases, with a high success rate. On evasion, HMRC has secured 413 criminal convictions, resulting in more than £1 billion in additional revenue and revenue-loss prevention. Those are significant achievements,

Anyone reading the papers recently might well think that avoidance is rampant. I want to reassure right hon. and hon. Members that that is not the case, and the vast majority pay their taxes without trying to get around the system. Nevertheless, where we and HMRC see people trying to exploit the system, we will take swift action. Currently, there are a minority of cowboy tax advisers—small niche firms selling crude avoidance schemes unlikely to be successful under challenge from HMRC. Many of those who sell those schemes use tactics that border on mis-selling, and their clients can end up shocked when they are later pursued by HMRC over their involvement. The Government recognise the need to do more to target those who market such schemes to protect taxpayers and prevent them from entering into them.

[Mr Meacher]

Given what is widely accepted to be the unacceptable narrowness of GAAR, why are the Government not prepared to accept GANTIP? It would achieve what the Exchequer Secretary wants, which will not be achieved by GAAR.

[Mr Gauke]

If the right hon. Gentleman will forgive me, I will turn to that point later, although I am sure the House is looking forward to debating this matter at greater length tomorrow—I know that he is.

These aggressive tax avoidance schemes are the reason we recently launched our consultation entitled, “Lifting the Lid on Tax Avoidance Schemes”, setting out ways to improve the information on avoidance available to the public and making it easier for taxpayers to see whether their adviser has promoted failed avoidance schemes in the past. I have been encouraged by the response of the professional bodies, which share the aim of addressing the small fringe of cowboy advisers who promote such schemes. Some of the criticism of the tax profession as a whole has been unfair, but there is an issue with some aspects of it, which is why we are consulting on what we can do to address the problem and also to expand the regime covered by DOTAS—the disclosure of tax avoidance schemes—which the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), speaking for the Opposition, touched on. She is right that between its introduction in 2004 and the end of March 2012, it resulted in a total of 2,289 avoidance schemes being disclosed to HMRC. That, in turn, has led to more than 60 changes in tax law to stop avoidance.

[Steve Baker]

My hon. Friend makes his case powerfully, but I am concerned that we are locked into a paradigm of complexity and trying to deal with the consequences of that complexity. Does he share my view that if only we could find a route to tax simplification, we could make some of the problems disappear at source?

[Mr Gauke]

My hon. Friend is right to say that tax simplification has an important role. I do not think that it is a magic bullet or that it cures every problem, because there will inevitably be some complexity in a modern economy. However, where we can remove some of those complexities and boundary issues, that is clearly helpful. My point is that DOTAS is a valuable part of our tax regime, but we want to improve on it. There is scope for improvement, and more information could and should be disclosed to HMRC to enable it to address tax avoidance.

Let me turn to the GAAR. We are improving how we counteract avoidance once it is detected, through the UK’s first general anti-abuse rule. I note the criticism made by Labour Members, but when they were in power—indeed, some of them were distinguished in the former Government—they refused to bring forward a general anti-abuse rule. The GAAR will specifically target the most aggressive and persistent forms of avoidance without undermining taxpayer certainty or adding undue compliance costs to the tax system. I am confident that, unlike other suggested approaches, the Government’s approach strikes the right balance between protection against avoidance and clarity for taxpayers.

I know that there is an alternative argument, based on the proposal from the right hon. Member for Oldham West and Royton, which was drafted by Richard Murphy, as he said. However, I would make this argument to him:

“I…think that many appropriate checks and balances are built in to the drafting. HMRC cannot use this”—

the GAAR—

“willy-nilly, and that’s right. This should be a tool of last resort and not a battering ram for widespread use.”

Those words are from Richard Murphy, who was commenting on Graham Aaronson’s proposals. I know that Mr Murphy will be following this debate closely, and I think it right that we quote his views thoroughly. He also said:

“Appropriate defences for action are built in. Safeguards to prevent HMRC over-using the provision are included. The result is that the rule will be used against egregious cases, and not be aimed at all tax planning. That’s right: where the law provides for choice, planning is inevitable and right and I for one have never denied that fact.”

Finally, Mr Murphy said this in response to the Aaronson proposals:

“Let’s have no doubt about it: this is a very big step forward for tax justice and I warmly welcome this report and hope it moves rapidly towards becoming law.”

I entirely agree with those comments. I do not, in all fairness, always agree with Mr Murphy, and he does not always agree with me, but on this occasion he is absolutely right to set out the fact that there are safeguards.

I want to let the right hon. Member for Oldham West and Royton respond, but let me quickly deal with evasion. We encourage compliance, while making it clear that if people do not take the opportunity, we will find them and they will be subject to stringent penalties, and possibly prosecution. The measures that HMRC is taking include: 1,000 extra prosecutions a year for tax evasion by 2014-15; an enhanced, state-of-the-art risk profiling tool, Connect, that helps to identify tax cheats by cross-matching data to uncover hidden relationships between people and organisations; campaigns and new policies—such as the contractual disclosure facility—to encourage voluntary disclosure of evasion; specialist staff to provide a single point of contact for the 2,000 largest businesses and to address the growing risk of cybercrime; and taskforces carrying out intensive reviews in high-risk trade sectors.

We are active in tackling offshore evasion activity. That concern was raised by a number of Members. We now have a number of agreements with other tax jurisdictions, including the Liechtenstein disclosure facility, which the hon. Member for Newcastle upon Tyne North mentioned. That will require financial intermediaries to identify those who may have a UK tax liability, and it is expected to raise £3 billion by 2016. More recently, the Government have finalised a ground-breaking agreement with Switzerland on tackling tax evasion. It will apply to UK-based Swiss account holders and is expected to raise £4 billion to £7 billion a year.

Collectively, the avoidance and evasion measures that I have set out today, along with our record on general compliance, show how seriously this Government take any threat to our tax base. We are not complacent, however, and our plans to take a tougher stance on disclosure rules and the promoters of avoidance, to introduce a general anti-abuse rule, and continuously to target those who illegally evade tax all help to demonstrate that fact. I hope that the House will appreciate the steps that we are taking.

Oral Answers to Questions

David Gauke Excerpts

Tuesday 11th September 2012 Commons Chamber

[Mr Tom Clarke (Coatbridge, Chryston and Bellshill) (Lab)]

4. What recent estimate he has made of the effect on pensioners of plans to end age-related tax allowances.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

The impacts of the reforms to age-related allowances were set out alongside Budget 2012. Half of those over the age of 65 pay no income tax, and nobody will pay more tax in 2013-14 than in 2012-13 as a result of these changes. The Government remain committed to supporting pensioners and have introduced the triple guarantee for the basic state pension, ensuring that it will increase each and every year by the highest of earnings, prices or 2.5%.

[Mr Clarke]

Will the Minister explain to my constituents why people with small occupational pensions are paying more while millionaires are paying less in tax?

[Mr Gauke]

The right hon. Gentleman will be aware that the policy announcements in the last Budget resulted in millionaires paying more in tax, not less. As far as this Government’s record on pensioners is concerned, let us not forget that the state pension is going up by £120 more compared with the Opposition party’s plans.

[Duncan Hames (Chippenham) (LD)]

For a long time, some pensioners, by virtue of having their personal allowance clawed back, have found themselves paying an effective rate of income tax far higher than many working people on a similar income. Will the Government’s policy of raising the personal allowance mean that that unfairness is eventually brought to an end?

[Mr Gauke]

I am pleased to say that my hon. Friend is right. Our policy will reduce complexity in the tax system and reduce the need for high marginal rates for pensioners through the taper system.

[Mr George Mudie (Leeds East) (Lab)]

5. What assessment he has made of the implications for his policies of the public sector net borrowing figures in the current fiscal year.

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[Mr Dominic Raab (Esher and Walton) (Con)]

8. What steps he is taking to simplify the tax system.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

The Government are committed to simplifying the tax system. Since 2010 we have set up the Office of Tax Simplification and acted on a range of its recommendations. We have abolished 43 tax reliefs, and from April 2013 we will introduce a new cash basis for calculating tax, benefiting up to 3 million small self-employed businesses. Her Majesty’s Revenue and Customs is also improving tax administration for small businesses, as set out in its publication at the time of the 2012 Budget.

[Mr Raab]

I thank the Minister for that response. The 2020 Tax Commission found that UK tax administration costs were double those of Norway, triple those of Estonia, and almost five times higher than in Switzerland, so I welcome the Minister’s drive for simplification. What progress has been made on merging national insurance and income tax, and other areas affecting business, that could yield an estimated £5 billion each year for the British economy?

[Mr Gauke]

The Government are continuing to explore the potential of merging the operation of income tax and national insurance contributions. We also want to make the tax system as transparent as possible, and one of the steps we have taken is the introduction of personal tax statements that will make it clearer to taxpayers how much they are paying in both income tax and national insurance.

[Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)]

The Minister will be aware that his colleague the Chancellor presented the granny tax as a tax simplification in the Budget. Is the Minister confident that further measures of tax simplification will be more successful and less unpopular than the granny tax?

[Mr Gauke]

We believe that tax simplification is important. A simpler tax system makes it easier for taxpayers to see how much they are paying, easier for businesses to comply, and easier to tackle avoidance. It is something the Government believe in.

[Steve Brine (Winchester) (Con)]

9. What plans he has to maintain low market interest rates.

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[The Exchequer Secretary to the Treasury (Mr David Gauke)]

The Government aim to provide a climate of economic stability that will benefit all businesses. That would not be possible without a credible plan to deal with Government debt, and a VAT increase is an important component of that plan.

[Chris Evans]

Since January this year, 42 retail businesses in Wales have gone to the wall. What message does the Minister have for Welsh business leaders who have called for a reduction in VAT to breath new life into the high street?

[Mr Gauke]

Retail sales growth has generally been positive over the past year. Let me underline this point: if the biggest problem faced by the economy at the moment is that we are not borrowing enough, that is, I am afraid, a very strange diagnosis.

[Charlie Elphicke (Dover) (Con)]

If the Government were to adopt that unfunded mandate and the other £200 billion of unfunded borrowing suggested by the Opposition, what would be the effect on interest rates and our national credit rating?

[Mr Gauke]

There is no doubt that such a policy would be taking an enormous risk with interest rates and our credibility. This Government are not prepared to take that risk.

[Naomi Long (Belfast East) (Alliance)]

11. If he will commission research to determine the effect of air passenger duty on UK holidaymakers, employment and economic growth.

--- Later in debate ---

[Mr Marcus Jones (Nuneaton) (Con)]

T4. Small businesses in my constituency regularly raise with me the issue of the administration and service levels at Her Majesty’s Revenue and Customs. Those problems constantly add to the administrative burden of small businesses. What more can the Government do to make HMRC more efficient, in order to unburden our small businesses and let them get on with the day job?

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

My hon. Friend will be aware of the paper that HMRC produced at the time of the last Budget, in which it set out the ways in which we would reduce the administrative burden on small businesses, including cash accounting. He mentioned the difficulties in getting through to HMRC and the problems with the contact centres. HMRC is making further investments and employing an additional 1,000 people in order to improve the performance at its contact centres.

[Derek Twigg (Halton) (Lab)]

T7. The Chief Secretary to the Treasury was asked earlier about the cost of living, but he said nothing in his reply about what the Government were doing about rising food, transport and energy prices. Have he and his colleagues had discussions with the Energy Secretary about getting a grip on the energy companies and sorting out the soaring energy prices and the profits that the companies are making as a result?

--- Later in debate ---

[Jenny Chapman (Darlington) (Lab)]

Will Ministers look urgently at the length of time it is taking to process tax credit applications? My constituents are being declined their tax credits simply because they are on fixed-term contracts that come to an end before the tax credit application is considered.

[Mr Gauke]

I certainly take the hon. Lady’s comments on board. It is our intention to deal with tax credit applications as swiftly as possible. We will look at individual cases, so if she wants to contact me or the permanent secretary at HMRC, either of us would be happy to take the case up.

[Nadine Dorries (Mid Bedfordshire) (Con)]

The Government are to invest £17 billion in phase 1 of HS2, which will transport someone from London to Birmingham 20 minutes quicker, yet there are students in my constituency today who cannot accept their place in Bedford college because of the lack of a local transport network, and constituents who cannot accept offers of work because they cannot get to the train stations via a bus network. Would it not be a better use of that investment to put it into regional transport networks so that people can get to work and to college?

Small Charitable Donations Bill

David Gauke Excerpts

Tuesday 4th September 2012 Commons Chamber

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

We have had a thoughtful and constructive debate, although the hon. Member for Harrow West (Mr Thomas) perhaps introduced a party political element in the past few minutes.

Throughout the debate we have heard hon. Members from all parties raise thoughtful points. My hon. Friend the Member for Dartford (Gareth Johnson) made the point that the purpose is to complement, not replace, gift aid. The hon. Member for Clwyd South (Susan Elan Jones) gave us a history of charity law and taxation going back to 1601, although she missed a bit before returning to more recent years—the House is probably grateful that she did not run through the 17th, 18th and 19th centuries in detail. My hon. Friend the Member for Stafford (Jeremy Lefroy) pointed out the need to strike a balance between simplicity and preventing fraud. A number of speakers returned to that point, including the hon. Member for Banff and Buchan (Dr Whiteford), who raised a number of detailed points, as did my hon. Friend the Member for Warwick and Leamington (Chris White). I know that he has also done so in correspondence with my hon. Friend the Economic Secretary. As has already been pointed out, he also highlighted the generosity of the good people of Leamington. The hon. Member for Foyle (Mark Durkan) also set out a number of detailed points, as did my hon. Friend the Member for Milton Keynes South (Iain Stewart) and the hon. Member for Brent North (Barry Gardiner). I hope to address as many of those points as possible this evening, but I am sure that the Public Bill Committee will enjoy scrutinising them very thoroughly.

I am grateful for the widespread support from across the House for the principle behind the scheme and I hope to be able to respond to the issues raised, but before I do so let me recap. As my hon. Friend the Economic Secretary set out at the beginning of the debate, the new scheme is not designed to replace gift aid. It complements it, allowing charities to claim for the cash donations they receive for which it is too difficult or impossible to get a gift aid declaration. The scheme is not intended to replace gift aid or to be a substitute for it in cases where it is straightforward to operate for charities of all sizes. Whenever and wherever possible, we want charities to make full use of gift aid, which is a very successful tax relief that contributes more than £1 billion annually to the charitable sector’s income.

A number of Members were concerned about complexity in the scheme and the fact that it might exclude the small community charities that could benefit most from it. Let me assure Members that it will not do that, as the basic scheme is very simple. Claiming on donations under the scheme will be simple, with no requirement to obtain a gift aid declaration from donors and with claims being made on the same form used to claim gift aid payments. Charities will not be required to keep any additional records of the money received over and above best practice record keeping. As the scheme is simple and based on cash donations and will have limited donor records, the scheme could, however, become attractive to fraudsters. I am sure that all hon. Members will agree that we must protect the scheme from abuse and one way of doing that is by linking it to gift aid.

It was said that the gift aid small donations scheme excludes those charities that would most benefit from it—the small charities that do not currently claim gift aid—but it is right that it should be a requirement for charities participating in the small donations scheme to claim gift aid alongside it. Gift aid is easy to use if the charity is simply collecting donations of money and it will soon become even easier when HMRC introduces its new online system for claiming gift aid next year. We hope that the small donations scheme will encourage those charities that do not use gift aid to do so.

The design of the scheme, with a requirement for a three-year successful track record of claiming gift aid, is one way to counter the fraudsters and protect the scheme from abuse. It is a straightforward way to protect the scheme from exploitation without reintroducing all the paperwork that it is designed to remove. I am sure hon. Members will agree that it is only sensible for the scheme to have a test, such as that three-year check, so that HMRC can be more certain that a charity will not abuse the scheme. Reducing the three-year limit, as has been suggested, would significantly increase the cost of the scheme.

Let me turn now to the point specifically raised by the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) about trustees and the concern about charities that are connected by a shared trustee. The Bill sets out that for trustees to be connected they would have to have purposes or undertake activities that were the same or substantially similar. If someone was a trustee of two charities that were completely unrelated and did very different sorts of charitable activities, those charities would not be connected under the scheme. We received some feedback on that rule during the consultation and adapted it to meet concerns that charities would unintentionally be caught by the rule as originally proposed. We are looking further into that, however, to see whether it would be possible to amend it further to ensure that no charities are caught unintentionally.

Another concern that has been raised is the community building rule and the question of access to the scheme for those charities doing similar work at a local level. The community building rule has been written into the Bill to ensure fairness of access and to avoid significantly unfair results. Most charities will not need to worry about the rule because they are independent and collect less than £5,000 in small donations, so they will get their £5,000 allowance regardless of their activities or where they collect the donations. But we sought fair access to the scheme. As my colleague the Economic Secretary said, in developing the scheme, it soon became clear that without some special rules, some charities would benefit hundreds or even thousands of times more than others, based purely on the way they were historically set up. That clearly is not right, so the community building rule was introduced to avoid significantly unfair results between charities carrying out similar activities in local communities, either as independent charities under an umbrella organisation or as local groups operating as part of a single large charity.

The vast majority of charities will not need to concern themselves with the extra allowance. For those that do, there will be detailed guidance to ensure that it is simple to access. It is important to remember that the basic principle of the scheme is that each eligible charity should be entitled to top-up payments on a maximum of £5,000 in donations. I am sure hon. Members will agree that we are doing the right thing to ensure fairer access to the scheme for charities that would otherwise lose out, just because of the way they were historically set up.

The intention of the community building rule is not to allow all buildings where charitable activities take place to receive a separate allowance of up to £5,000 of small cash donations; it is to remove the worst inequalities that would otherwise exist, so that some charities would be able to claim hundreds, perhaps thousands, times more payments under the scheme than others undertaking similar activities. We believe that the rule as drafted achieves that objective.

I want to pick up a point about the definition of charitable purpose raised by the hon. Members for Kilmarnock and Loudoun and for Banff and Buchan and about its application in Scotland as well as in England, given that charitable purpose is being used in the English definition. Given that top-up payments are not a tax relief, clause 17(2)(a) makes it clear that the definition of charitable purpose according to the law of England and Wales is to be applied across the United Kingdom. The hon. Member for Banff and Buchan raised an important point about the Bill applying across the UK, and said that we should ensure that devolved issues are considered. I assure the House that the devolved implications have been explored and agreed with policy administrators in all the devolved Administrations.

The hon. Member for Kilmarnock and Loudoun and my hon. Friend the Member for Stafford referred to the £20 limit and asked what is meant by managers taking reasonable steps to find out whether a gift was £20 or less. Charities will be expected to have a process to ensure that their staff and volunteers do not deliberately include gifts of £20 or more as small donations. HMRC is developing guidance to explain the steps it would be reasonable for charities to take, but those steps will be proportionate to the risk because we want to ensure that the rules are applied with a light touch and give charities maximum flexibility. The aim of the scheme is to allow a top-up payment without a gift aid declaration on small donations, and we think £20 covers that. For larger donations, charities are more likely to be able to ask the donor for a declaration. We have already increased the limit from £10 to £20 following earlier representations.

Another issue raised by the hon. Member for Banff and Buchan related to donations by text—which are growing in use—cheque or credit card, which are not allowed under the scheme. The aim of the new gift aid small donations scheme is to allow charities and community amateur sports clubs to claim a gift aid-style payment on cash donations received in circumstances where it is difficult to collect a donor’s details or where donors may be reluctant to give them. As a donor may be giving details to the charity through other channels, and the extra amount of information needed for a gift aid declaration is therefore relatively small, we are focusing the scheme on cash. Where a charity has an ongoing relationship with a donor, we believe it should use gift aid if at all possible.

In an intervention and in his speech, the hon. Member for Brent North asked about the Treasury’s assessment of how many charities would take up the scheme. We estimate that around 80,000 individual charities will claim annually by 2016-17. Some charities will make extra claims on behalf of their local groups under the community building rule and some of those local groups may make claims for gift aid on behalf of their parent charity. However, it is only an estimate, so the take-up rate could be higher or lower. The fundamental methodology for costing the scheme, at around £100 million, as my hon. Friend the Economic Secretary pointed out earlier, was signed off by the independent Office for Budget Responsibility in the 2011 Budget. The final numbers, including assumptions about local groups, will be submitted to the OBR for approval at the next fiscal event.

[Barry Gardiner]

I am grateful to the Minister for answering the question directly. Could he be slightly more specific than just the number of groups? The concern is not just about the number of charities, because they may be medium-sized or larger; it is about their nature, scope and size. Does he have any evidence about that from Treasury assessments?

[Mr Gauke]

More information may be available during the Public Bill Committee—the hon. Gentleman looks like an enthusiastic volunteer. My hon. Friend the Economic Secretary pointed out earlier that a pool of about 100,000 charities have claimed gift aid in the past four years, and we think about 80,000 of them will make a claim under the scheme.

To return to the central point, there is a reason for linking the scheme to gift aid: to prevent fraud and ensure that the money goes to genuine charities. I am sure we share the belief that the measure is the best way of doing that. I hear the concerns that have been raised about smaller charities that may not submit gift aid applications, but we have to remember that the scheme involves paying out taxpayers’ money, so we need to ensure that it goes in the right direction.

To conclude, in designing the gift aid small donations scheme the Government have listened to the sector and made a number of changes following consultation. We reduced the level of matching required between gift aid claims and donations under the scheme, to make it easier for small charities to claim. We refined the rules for better targeting when charities are connected to one another, and we increased flexibility for connected charities to share their allocation under the scheme. However, I remind hon. Members that the overall objective of the scheme is to allow individual charities to claim a top-up payment on up to £5,000 of donations. The Bill will provide much-needed additional financial support to the charitable sector in these tough times. I therefore commend it to the House.

Question put and agreed to.

Bill accordingly read a Second time.

small charitable donations bill (programme)

Motion made, and Question put forthwith (Standing Order No. 83A(7)),

That the following provisions shall apply to the Small Charitable Donations Bill.

Committal

1. The Bill shall be committed to a Public Bill Committee.

Proceedings in Public Bill Committee

2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Tuesday 30 October 2012.

3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets.

Consideration and Third Reading

4. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.

5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.

6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.

Other proceedings

7. Any other proceedings on the Bill (including any proceedings on consideration of Lords Amendments or on any further messages from the Lords) may be programmed.—(Angela Watkinson.)

Question agreed to.

SMALL CHARITABLE DONATIONS BILL (MONEY)

Queen’s recommendation signified.

Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),

That, for the purposes of any Act resulting from the Small Charitable Donations Bill, it is expedient to authorise the payment out of money provided by Parliament of any increase attributable to the Act in the sums payable under any other Act out of money so provided.—(Angela Watkinson.)

Question agreed to.

Tax Policy (Consultation)

David Gauke Excerpts

Tuesday 17th July 2012 Written Statements

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

Budget 2012 announced a number of tax policy changes that will be subject to consultation. HM Revenue and Customs is today publishing the following documents:

High-risk areas of the tax code: the stamp duty land tax (SDLT) “transfer of rights” or “subsale” rules—A consultation on broad options to address SDLT subsales avoidance.

VAT treatment of small cable-based transport—A consultation on the introduction of a reduced rate of VAT for small cable-based transport.

The following consultations are due to be published during summer recess:

Life insurance policies: time apportioned reduction —A consultation on reform to time apportionment reductions reflecting a policyholder’s period of residence outside the UK.

Foreign currency assets and chargeable gains—A consultation on whether to introduce a rule requiring companies with a non-sterling functional currency to compute their capital gains and losses in their functional currency.

Details of these and other planned consultations are included in a consultation tracker, available from the HM Treasury website:

http://www.hm-treasury.gov.uk/tax_updates.htm.

The tracker includes specific anticipated launch dates wherever possible, to help representative groups and others manage their engagement with the Government on tax policy development. Any changes to the dates mentioned above will be publicised on the tax consultation tracker.

Cap on Income Tax Relief (Technical Consultation)

David Gauke Excerpts

Friday 13th July 2012 Written Statements

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

At Budget 2012 the Government announced the introduction of a limit on currently uncapped income tax reliefs which will have effect from April 2013.

The Government have today published a consultation document on the delivery of the cap, which sets out the tax reliefs that will be included in the cap and contains consultation questions on the operation of the cap. The document is available on the HM Treasury website at:

http://www.hm-treasury.gov.uk/consult_income_tax_relief_cap.htm.

Views on the proposed approach to implementation set out in chapter 3 of the consultation document are sought by 5 October 2012. Draft legislation will be published in the autumn.

Inheritance Tax: Simplifying Charges on Trusts

David Gauke Excerpts

Friday 13th July 2012 Written Statements

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

HM Revenue and Customs (HMRC) is today announcing the publication of a consultation document “Inheritance Tax: Simplifying charges on trusts” which explores options for simplifying the calculation of inheritance tax charges on trusts.

The Government recognise that these calculations can be complex and time consuming and for some smaller trusts in particular the professional costs involved can often be disproportionately large compared to the tax at stake. The consultation is seeking views on ways of applying the charges without creating undue burdens for trustees where it can be done fairly and without loss to the Exchequer.

The consultation document has been deposited in the Libraries of both Houses and is available on the HMRC website.

Banking Competition

David Gauke Excerpts

Thursday 12th July 2012 Westminster Hall

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a very great pleasure to serve under your chairmanship, Mr Davies, and to see you, not for the first time, follow in the footsteps of Mr Chope, who chaired the sitting earlier. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) and thank her for securing this timely debate. Her thoughtful speech set the tone for the good debate that we have had this afternoon. In addition I thank my hon. Friends the Members for Wyre Forest (Mark Garnier), for Wycombe (Steve Baker), for Macclesfield (David Rutley), for Mid Norfolk (George Freeman) and for Wells (Tessa Munt) and the hon. Members for Erith and Thamesmead (Teresa Pearce), for Glasgow North East (Mr Bain) and for Islwyn (Chris Evans). Hon. Members have brought considerable personal experience to the debate, which has assisted the quality of our debate.

Let me begin by stating clearly that the Government are committed to fostering a strong, competitive banking sector for the benefit of consumers and the UK economy. That is why we asked Sir John Vickers, along with other members of the Independent Banking Commission, to examine the issues as part of his review of the banking sector, and are implementing his recommendations and, in some cases, going further. It is essential that consumers are able to apply competitive pressure and hold their bank to account as to the services it offers. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services to meet their needs. There should also be a diversity of institutions in the market, capable of meeting the varying needs of consumers. The Government’s strategy for competition encompasses many things, which I will mention in turn.

Creating the right environment for competition to flourish is essential to ensure that consumers benefit in the long term. The Government’s major financial stability reforms will help to enhance competition in financial services. Those reforms implement the recommendations of the IBC, which reported last year. Banks will no longer receive a competitive advantage by being perceived to be too big to fail—a point that my hon. Friend the Member for South Northamptonshire made. The Government’s plans to ring-fence banking services and increase banks’ capacity to absorb losses are also a vital step in creating the right environment for competition in banking to flourish.

By improving the authorities’ ability to deal with the failure of financial institutions in an orderly manner, the Government are substantially reducing the perceived implicit guarantee that benefits the large incumbents. That is part of a broad programme of financial sector reform to solve what my right hon. Friend the Chancellor has called the “British dilemma”—how to host a world-class financial services sector without putting UK taxpayers at risk.

We have seen a number of new entrants into the current account market in recent years, including Metro Bank. It is however essential that prospective new banks can enter the market to compete and that the requirements are not overly onerous or disproportionate. To ensure that that is the case, in the banking reform White Paper the Government announced that the FSA and the Bank of England are conducting reviews of the prudential and conduct requirements for new entrants to the banking sector.

The reviews will reassess the prudential requirements of the new Prudential Regulations Authority and the conduct requirements of the new Financial Conduct Authority, to ensure that they are proportionate and do not pose excessive barriers to entry or to expansion for new entrants. The conclusions of those reviews will be published in the autumn, and the FSA and the Bank of England have committed to introduce, where possible, any changes in advance of the new regulatory structure. That point was raised by a number of hon. Members; in particular, my hon. Friend the Member for Wyre Forest set out his concerns about the difficulties for new banks entering the market and how difficult it can be to obtain authorisation. He raises a fair concern, but of course the right balance, which we have to strike, would ensure that those receiving a banking licence were able to perform the activities that they needed to perform in a secure way. It is right that standards are robust.

That said, the FSA should administer a process that is as smooth as possible. It has already improved the bank authorisation process to make it easier for prospective new banks, and is encouraging potential applicants to attend pre-application meetings, for example. Those meetings allow the FSA to understand better the applicant’s business model and offer tailored guidance. It has also introduced a milestone document on a modular approach to assessing deposit-taking applications. Where appropriate, it will provide a letter stating that it is minded to approve applications subject to specific final conditions for the applicant to satisfy.

The changes significantly improve the process for becoming a new bank and many prospective new entrants will benefit from them in future. The changes also make the process of completing an application easier, while keeping standards high. Combined with the reviews I mentioned on the prudential and conduct requirements, which are under way, the changes help to ensure that the bank authorisation process is not a barrier to entry for prospective new banks.

I note the comments made by my hon. Friend the Member for Wyre Forest on publishing a checklist of the criteria that prospective new banks need to fulfil. I had a little experience of that in my previous career. Becoming a new bank is complex and it is right that the system is robust, but I am grateful for the constructive comments made.

I am also grateful to my hon. Friend the Member for Wycombe for highlighting this evening’s “Bank of Dave” programme and for his suggestion about my television viewing. I happened to be driving in my constituency yesterday, when I heard an interesting interview with Mr Fishwick. I look forward to the programme this evening. In reference to that particular example, the requirements are robust, as is generally the case. I do not want to be drawn into a specific case and I cannot comment on the precise activities that that business undertakes, but it is right that we ensure that the system has no undue barriers to entry. The regulation regime could potentially be such a barrier, and we must be vigilant on that point.

Let me turn to the creation of new challenger banks. For competition to drive better consumer outcomes, new providers must be willing to enter the market to compete with the big banks. Two new challenger banks are being created and will be on the high street in the next 18 months. We have heard a little about the sale by the Government of Northern Rock plc to Virgin Money, which creates a new and innovative challenger to the established big five. The sale was completed on 1 January 2012 and the organisation is a useful addition to the high street. I am sorry that the Opposition party remains opposed to that move, because it has increased competition. The National Audit Office said that the process run by United Kingdom Financial Investments Ltd was fair and transparent and that an early sale was the best step the Government could take to secure taxpayers’ interests. As I have said, the sale has introduced, at an early stage, more competition.

In addition, Lloyds is in the process of selling off more than 600 of its branches—the Verde divestment—and the Government are committed to ensuring that the divestment creates another strong challenger. The Government welcome the news that the Co-op and Lloyds have agreed an understanding on the commercial terms for Verde. If the deal with the Co-op goes ahead, the combined entity will already have more than the 6% of the personal current account market that was recommended by the Independent Commission on Banking and by my hon. Friend the Member for Wells.

Along with the Government’s sale of Northern Rock to Virgin Money, the sale by Lloyds will deliver a much bigger challenger bank to the retail banking market. The potential purchase of those branches by the Co-op is a significant boost to the mutuals, which the Government are committed to promote. Once the deal is completed, Co-operative bank will be a realistic, mutually owned challenger to the big five banks.

The Government are determined to ensure that the Lloyds divestment results in a strong challenger, regardless of the final commercial arrangements that Lloyds arrives at. They have actively engaged with the European Commission and Lloyds to ensure that that is the case.

The Government are also committed to promoting the mutuals sector as an alternative to banks. They are looking to ensure that there is a level playing field for building societies, and that growth of the sector is not hindered. Last Thursday, the Government set out their vision for the building societies sector in their discussion document, “The Future of Building Societies”. The document, which has been warmly welcomed by the sector, confirms the Government’s support for the distinctive alternative offered by building societies. It sets out proposals including aligning building societies legislation with the ring-fencing requirements for banks, and applying loss-absorbency proposals to building societies in the same way as to banks. Those proposals have received warm support from the industry, including from the Building Societies Association and the Nationwide.

[Mr Thomas]

What steps is the Minister taking to ensure that the staff who work in the new regulators have at least some genuine understanding of the mutual sector, be it credit unions, building societies or friendly societies? How many staff who have actually worked in that part of the sector are now part of the regulatory environment?

[Mr Gauke]

The hon. Gentleman would not expect me to be able to give him a precise answer as to how many staff within the new regulatory bodies have got specific experience of mutuals and some of the bodies that are under discussion today. Of course it is important for a regulatory authority to have sufficient depth and breadth of knowledge of the institutions that it regulates, and the Government are keen to ensure that that is the case.

Let me say a little about credit unions. The Government have removed unnecessary burdens on credit unions through the legislative reform order. One important aspect of that was to allow credit unions to admit as members corporate bodies such as local charities and firms, and relax restrictions on membership. Those new members can both deposit in and borrow from their local credit unions, thus providing further opportunities for investment and growth in communities.

Credit unions can act as an alternative to banks and building societies in providing affordable financial services to people who may otherwise not be able to access them. The Government have also announced that they will bring forward a co-operative consolidation Bill. Last month, the Department for Work and Pensions announced its credit union expansion project, which will invest £38 million to help credit unions modernise and grow to offer a real alternative to high-cost credit providers. Through all such actions, the Government are creating an environment in which mutually owned institutions can offer a real alternative for consumers, and compete with the banks to serve families and businesses that need to save and borrow for their future. However, I may have to disappoint the hon. Member for Erith and Thamesmead. I am not sure that we are persuaded by the case that every public sector worker has to be paid through a credit union. Were we to do that, there would be certain issues with regard to competition. None the less, I note her comments.

Let me turn to the issue of switching and portability, which a number of hon. Members raised, not least my hon. Friend the Member for South Northamptonshire. It is essential that consumers are able to apply competitive pressure and to hold their bank to account for the services that it offers. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services to meet their needs. To that end, the banking industry has committed to introduce, by September 2013, a free, safe and hassle-free switching service to ensure that customers can switch accounts within seven days. To date, banks representing more than 97% of the current account market have committed to being ready to launch the new seven-day switching service by the September 2013 deadline and the Government continue to hold the industry to account to that timetable.

The new switching service will ensure that consumers’ accounts will be switched within seven days, and that all direct debits and standing orders from their old account will be redirected to their new one. The redirection service will last for 13 months. The new service, including a guarantee that the process will be smooth and that consumers will suffer no financial loss, will help to tackle the perception held by many consumers that switching is difficult, costly or risky.

A number of hon. Members have said that we should adopt full account number portability. There are a number of ways in which such an approach could work. In essence, a customers’ account number and sort code, which links the account to a branch, would not change when the customer switched banks, thereby avoiding the need for the customer to change any payment or credit instructions, which would reduce the risk of payments being sent to the wrong account.

The Independent Commission on Banking considered full account number portability carefully and decided not to recommend it in its report of 12 September 2011. As we all know, the ICB recommended that a current account redirection service should be established to smooth the process of switching current accounts for individuals and small businesses. It concluded that the costs and incremental benefits of full account number portability were “uncertain relative to redirection” and that

“it appears that redirection may deliver many of the benefits of account number portability at lower cost.”

As I have mentioned, the Government strongly support the ICB recommendation on switching and are holding the industry to account to deliver by the September 2013 deadline. Once the new switching service is operational, the Government will assess whether the service has delivered the expected consumer benefits. If not, further measures, including full account portability, will be considered. Given where we are and the recommendations of the ICB, we believe that it is right to proceed with the plans currently in place.

A number of hon. Members raised the issue of transparency. They want to ensure that customers can see exactly what services are provided and the costs that apply. The Government are clear that banking needs to become more transparent, and that is a perfectly fair point. A number of transparency measures are already being implemented in retail banking, including making charges clearer on customers’ monthly statements and providing an annual statement of charges for each customer. The annual statement will allow customers to see how much their account has cost them and it will provide an opportunity for them to consider whether they are getting good value.

That is a welcome start, but more must be done. As set out in the recent White Paper on banking reform, the Government see increased transparency and financial capability as an integral part of a competitive banking sector. The Office of Fair Trading has announced that it will conduct a review of the personal current account market in 2012, assessing levels of transparency in the market and the impact of the measures that have already been taken to improve transparency, as well as taking forward the recommendations of the Independent Commission on Banking on including interest forgone on bank statements and annual summaries.

[Mr Thomas]

I thank the Minister for giving way again on the issue of transparency. Why have the Government not included in their proposals for banking reform the idea that there should be a requirement on banks to disclose what they lend and where they lend on a postcode basis, to help us understand where the Thamesmeads, the north Harrows and the other unbanked areas in the UK are, so that we can better direct resources and new challenger banks to those areas?

[Mr Gauke]

Indeed, that issue was raised by the hon. Members for Islwyn and for Erith and Thamesmead during the debate. I say to the hon. Gentleman that data releases by postcode by each bank for all customers would be a very considerable undertaking for banks. It would also create a significant regulatory burden, and let us not forget that considerable regulatory burdens can prove to be a barrier to entry. At a time when we want to ensure that there is more competition, we must bear that in mind. It is also worth pointing out that there are legitimate differences between different areas for lending figures, including differences in credit risk. One would not expect there to be similar lending figures across the country. I caution against a reaction that would mean the imposition of a further regulatory burden.

Let me return to the issue of transparency. The Financial Conduct Authority will take a proactive approach to consumer protection. It will focus on the transparency of information that is available to consumers of financial services. The FCA will carry out a fundamental review of how transparency will be embedded in the new regime, both by the regulator and by firms, and it will publish a discussion paper in the first quarter of 2013. The review will consider what further measures could be introduced to improve the quantity and quality of the information that customers receive, enabling them to make informed choices and exert competitive pressure on firms.

Let me pick up on some other points that were made during the debate. The hon. Member for Erith and Thamesmead made a point about the payments clearing system; she was concerned that the big banks controlled that system. My response is that the Bank of England already has a large role in the UK payments system, given that the stability of that system is of paramount importance, and shortly the Government will issue a consultation on the future strategy-setting of the payments industry to ensure that consumers and smaller banks have a louder voice. I hope that all Members support that process.

The issue of access to banking services was raised in the debate, including by the hon. Member for Harrow West (Mr Thomas) in his recent intervention. The Government are committed to improving access to financial services and in particular to bank accounts, which was another point made earlier in the debate. It has been amply demonstrated that having a bank account is an essential aspect of modern life for any individual. Being able to access counter services at a branch and interact face to face with staff is very much valued by many individuals and businesses. However, the issue of where particular branches are located and maintained is fundamentally a commercial decision and one for the financial institution in question, rather than the Government, to make. Therefore, the Government do not intervene in such decisions. All banking service providers will need to balance customer interests, market competition and other commercial factors when they consider their strategy. Nevertheless, banks must treat their customers fairly.

I will say a word or two about the FCA. To ensure that consumers are adequately protected in accessing financial services, the Government are reforming the regulation of financial services. Part of that process includes creating a new dedicated conduct of business regulator—the FCA. Securing effective competition in the market for financial services is a key mechanism for securing better outcomes for consumers, and the FCA’s new competition mandate will be central to achieving that. The FCA will have an operational objective to promote effective competition in the interests of consumers, and it will also be under a competition duty, driving it to look for competition-led solutions to conduct issues more generally and in pursuit of its “consumer protection” and “integrity” operational objectives.

The FCA will have the mandate to use its powers to tackle competition problems more swiftly and effectively than the Financial Services Authority did previously, for example by promoting switching, removing barriers to entry or addressing asymmetries of information. A more proactive approach will lead to better consumer outcomes as problems will be tackled sooner, before they give rise to significant detriment. For instance, the FCA will take a keener interest in how products are designed and distributed in the first place, and it will have a new power to ban or impose restrictions on products that it considers could cause significant detriment.

Greater transparency and disclosure will also be at the heart of the FCA’s new approach. For example, it will have new powers to disclose the fact that a warning notice in respect of disciplinary action has been issued, and to publicise details of actions taken against misleading financial promotions.

In conclusion, banking competition is essential for consumers, businesses and the economy to prosper. The Government are undertaking a number of significant reforms to enhance competition and we continue to work hard to consider how best to improve competition in banking while maintaining the UK’s position as a global financial centre. In that context, I thank hon. Members for their well-considered comments and suggestions today. A number of excellent points have been made today by hon. Members and they all contribute to the valuable debate about banking competition.

Community Banks

David Gauke Excerpts

Tuesday 10th July 2012 Westminster Hall

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship, Mr Robertson. I congratulate my hon. Friend the Member for Hexham (Guy Opperman) on securing this important debate. He raised some interesting and important points to which I hope to respond.

First, let me make it clear that the Government believe that it is important for consumers to be able to access an appropriate range of financial products and services, and that we are committed to fostering a strong, diverse and competitive banking sector. To achieve that, we must ensure that consumers can apply competitive pressure and hold their banks to account for the services they offer. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services for their needs. The Government are, therefore, committed to fostering diversity and promoting competition in the banking sector.

To help with the delivery of those aims, the banking industry has committed to introducing a fast, safe and hassle-free switching service, which will ensure that by September 2013 customers can switch accounts within seven days. That is further to transparency measures that are already being implemented more widely in the personal current account market, including making charges clearer on customers’ monthly statements, and providing an annual statement of charges for each customer.

As well as people having the freedom and information to switch banks according to their needs and wishes, it is important that new firms are free to enter the sector. I am pleased that we have seen a number of new entrants into the current account market in recent years, including Metro Bank, and it is essential that the regulatory regime facilitate that wherever possible. That is why the Chancellor announced in the banking reform White Paper that the Bank of England and the Financial Services Authority will conduct reviews of the prudential and conduct requirements for new entrants to the banking sector, to ensure that the requirements are proportionate and do not pose excessive barriers to entry or expansion for new, and prospective new, entrants. The conclusions of those reviews will be published in the autumn when the FSA and the Bank of England set out the detail of the new supervisory models for the Prudential Regulatory Authority and the Financial Conduct Authority, and the FSA and the Bank of England have committed to introducing the changes in advance of the new regulatory structure, where possible.

The Government are also committed to promoting mutuals and fostering diversity in financial services. By promoting financial mutuals, the Government are ensuring that consumers have an alternative model, which can provide competition to the shareholder-owned banks. Last Thursday, we set out the Government’s vision for the building society sector in “The future of building societies”. The document, which has been warmly welcomed by the sector, confirms the Government’s support for the distinctive alternative offering provided by building societies. It outlines the Government’s intention to remove unnecessary barriers to growth, and to help create a more level playing field with banks. In addition, in January the Prime Minister announced that the Government will introduce a co-ops consolidation Bill, which will raise the profile of the co-operative alternative and make it easier to adopt it as a corporate form. By ensuring there is an environment in which building societies can not only survive but thrive, the Government are facilitating a mutually owned source of competition for the big banks for many generations of home owners and savers, and supporting building societies with ambitions to expand their business models: for instance, into providing vital lending to small businesses.

Promoting diversity in financial services goes wider than banks and building societies. Credit unions can act as an excellent alternative, providing affordable financial services to people who would not otherwise be able to access them. This Government have taken action to help promote credit unions and their role of offering financial services to their communities. We have removed unnecessary burdens by bringing into force a legislative reform order giving a much wider group of people the ability to take advantage of the benefits of credit union membership. We have brought Northern Ireland’s credit unions under the regulatory oversight of the FSA so that from April, for the first time, the deposits of Northern Ireland credit union members will be protected by the Financial Services Compensation Scheme, enabling members to save with credit unions with confidence. We have also announced a credit union expansion project, which will invest £38 million to help credit unions modernise and grow in order to offer a real alternative to high-cost credit providers. Through all those actions, the Government are creating an environment where credit unions can offer an alternative and compete with banks to serve families and businesses that need to save and borrow for their future.

My hon. Friend discussed the Royal Bank of Scotland and advocated its playing a role in supporting the creation of local community banks. The Government’s shareholdings of RBS are managed on a commercial and arm’s-length basis by UK Financial Investments Ltd, a company wholly owned by the Government. UKFI’s overarching objective is to protect and create value for the taxpayer as shareholder, with due regard to financial stability and promoting competition. UKFI’s role is to manage the investments, not the banks. The banks retain their own independent boards and management teams to manage the banks commercially without interference from shareholders. Like all banking service providers, they must balance customer interests, market competition and other commercial factors when considering their strategy, so the Government do not tell RBS or any other bank where to operate branches.

On shares for the people—my hon. Friend explained his proposal in detail—UKFI will consider the full range of alternatives for investment and make its recommendations based on market conditions, an assessment of investor demand and value for money considerations. However, the ultimate decision to proceed with any transaction will rest with the Chancellor.

My hon. Friend also described the difficulties that local business can face in accessing finance from banks. I assure him that the Government recognise that small and medium-sized enterprises are fundamental to economic recovery. That is why the Chancellor launched two credit easing schemes in March 2012. The national loan guarantee scheme reduces the cost of borrowing for SMEs by 1%, and the business finance partnership will invest £1.2 billion through non-banking lending channels. Together, the schemes support SMEs in accessing cheaper finance while diversifying the range of finance resources available, stimulating the non-bank lending sector. At Budget 2012, the Government also extended the enterprise finance guarantee, which will enable over £2 billion of lending over the next four years to businesses with insufficient collateral or track record.

We continue to help UK businesses access the finance they need. That is why the Chancellor and the Governor of the Bank of England announced the new funding for lending scheme at Mansion House on 14 June. The scheme will support credit for the whole economy by making it easier for banks to lend to businesses and families. In return for additional new lending across the whole economy, the scheme will reduce bank funding pressures, which have been increasing due to instability in the international financial markets. We are working closely with the Bank of England on the design of the FLS and will release further details shortly.

As I mentioned in my opening remarks, the Government believe that it is important for consumers to be able to access an appropriate range of financial products and services and are committed to fostering a strong, diverse and competitive banking sector, a point raised by my hon. Friend. I hope that it is clear to him from the initiatives I have described that we are pursuing a substantial agenda in that area through both regulatory and non-regulatory means.

The regulatory landscape is changing, just as customers’ needs are, and the financial services sector will need to continue to evolve to take account of that. At the same time, it is important that it continues to meet the needs of ordinary customers, an issue that I know is close to my hon. Friend’s heart.

I thank my hon. Friend once again for raising these important issues and bringing them to my attention and that of the House, and I thank my hon. Friends the Members for Carlisle (John Stevenson) and for Warwick and Leamington (Chris White), and the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), for their contributions.

[Guy Opperman]

Clearly, the disposal of RBS, in whatever shape or form, is ultimately for the Government and the Chancellor of the Exchequer, having considered a full range of alternatives, market conditions and value for money. If it is not commercially viable to return RBS to the private sector, will the option of returning it to a local banking organisation, as I have described, be considered?

[Mr Gauke]

My hon. Friend is absolutely right that that is a decision for the Chancellor of the Exchequer. All I will say at this point is that I am confident the Chancellor will want to consider all options, particularly in the circumstances my hon. Friend describes. Numerous factors would need to be taken into account in any decision, including value for money for the taxpayer.

The Government are clear that banks and building societies should serve the economy. I assure my hon. Friend that the issue will continue to receive the highest level of attention from Government. We are grateful to him for raising so many important issues in this debate.