Clause 2 - Cars: determination of consideration for fuel supplied for private use

Finance Bill – in a Public Bill Committee am 10:45 am ar 21 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of John Healey John Healey The Financial Secretary to the Treasury

Sir Nicholas, I welcome you and your co-Chairman. Based on my experience of other Committees, let me say that I appreciate to the firm and fair way in which you conduct proceedings. I look forward to serving under your chairmanship and that of Mr. Cook.

Clause 2 is modest and straightforward. It is designed to provide the flexibility for the VAT fuel scale charge system to be amended to include a charge based on a vehicle's carbon dioxide emissions. The fuel scale charge system is a business facilitation measure that offers a simplified method of taxing the private use of a fuel when a vehicle is used for both business and private purposes. Without such a system, taxpayers would have to keep a full record of mileage driven in order to apportion the tax charge between private and business motoring. Taxpayers can choose to operate the normal rules and keep such detailed mileage records if they wish, but, unsurprisingly, most businesses choose to apply the fuel scale charge.

In broad terms, the system provides the taxpayer with a figure for the average fuel expenditure on private mileage, the calculation of which is based on private motoring data. Business tax payers use that figure to calculate an output VAT charge to account for their private mileage. The current charge is based on a combination of engine size and type of fuel. Clause 2 gives the flexibility to reform the charge to one based on CO?2? emissions, which would align the VAT fuel scale charge with the Government's other reforms to transport taxation in order to support our environmental objectives on climate change and air quality and to encourage a switch to less polluting cars through tax incentives and other measures.

The proposal is entirely consistent with the action that we have taken since 1997 and with our reforms to vehicle excise duty in 2001, to company car tax in 2002 and to the direct tax system for fuel scale charges in 2003. Let me clear: our objective in making the change is purely environmental, no more, no less. It is not intended as a revenue-raising measure. Any change to a CO?2? basis for the VAT fuel scale charge will be revenue neutral overall.

As members of the Committee would expect, Her Majesty's Revenue and Customs has already been discussing with business the proposed change to basing   the fuel scale charge on emissions. We have heard useful views in those discussions and the informal consultation, which we will continue before publishing any regulations to make the reforms that are provided for in clause 2. It is sensible to align the VAT system more closely with the direct tax fuel scale charge. It is sensible that businesses account for direct tax and VAT on fuel where possible on a consistent basis. It is obviously sensible that the industry has the opportunity to discuss the details of any scheme.

The flexibility contained in the clause acknowledges the need to secure a derogation from the European Commission before we can introduce such a scheme. It also offers the opportunity for HMRC to design an effective scheme, following detailed discussions with the industry. I commend the clause to the Committee.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I apologise to you, Sir Nicholas. It was remiss of me not to add my congratulations. I remember that when you were accorded a knighthood, I said that you were well on your way to becoming recognised as a living national treasure.

Photo of John Healey John Healey The Financial Secretary to the Treasury

There is no VAT relief on being a living national treasure. [Laughter.]

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I thank the hon. Gentlemen very much. They need not go on.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I thank the Financial Secretary for his explanation, and I am pleased that he has discussed the change with and consulted the business community. As he indicated, the clause paves the way for fuel scale charges—the notional VAT charge for fuel made available by employers to employees for private use—to be based on CO?2? emissions rather than engine capacity. It will penalise less efficient cars. It appears sensible to us, as it aligns the VAT bandings closely to those used for benefit in kind taxation.

However, will the Financial Secretary comment on what implication, if any, he thinks the measure will have for the Government's pursuit of a road pricing scheme?

Photo of Stephen Williams Stephen Williams Shadow Minister (Health)

Sir Nicholas, as this is the first time I have taken part in a Standing Committee, forgive me if I do not do things in the right way. We are not sure when to bob up or catch your eye. I have not known you long enough to be sure that you are a national treasure, but you and your wife were very kind to me in the Tea Room on my first day, when I was a bit lost, and I thank you for that.

I have a question to ask the Financial Secretary. It makes sense to us to align the direct tax treatment of an employee and an employer in respect of a benefit in kind. That treatment was introduced a few years ago. I wonder, however, what studies the Treasury has commissioned of whether the environmental objectives of that move have been met—whether the fleet purchasing decisions of fleet managers have been in any way affected by the changes to direct taxation, or whether the preferences of the company car users have been affected. Such a study would enable us to see whether tax changes that are intended to have environmental benefits actually have that effect.  

Photo of Mark Field Mark Field Shadow Financial Secretary

Although we do not wish to engage in a fully fledged debate on road charging, I support the comments made by my hon. Friend the Member for West Suffolk. The Financial Secretary assures us that the proposals will have a degree of revenue neutrality, on the basis that there will be some additional income because of additional CO?2? emissions. Can he give us some indication of which vehicles will therefore save money and, as a result, reduce Treasury income?

It would be worth while if the Financial Secretary were to comment, at least briefly, on the broader range of policies. He justified the change on the basis of consistency—the golden thread that has run through the Government's thinking on tax matters over the past six or seven years. There has been new thinking on road pricing; which affects many folk in my London constituency, and it is important that people are brought along with such thinking. If the measure is regarded simply as a revenue raiser—I am sure that the Financial Secretary would not suggest that it is that and that alone—it will have little public support. It is important that the Financial Secretary considers which aspects of good environmental behaviour will save taxpayers money, as well as which aspects of behaviour will be penalised.

Photo of John Healey John Healey The Financial Secretary to the Treasury

I welcome the welcome that both Opposition spokesmen have given to the principle of the clause and their endorsement of it as a sensible policy that moves things in the right direction.

I welcome the hon. Member for Bristol, West to the Committee. It is clear from his biography that he brings to it significant professional experience of tax affairs, which he gained before being elected to Parliament. I look forward to hearing his contributions to our debates. I say to him that we are careful to monitor the impact of changes we introduce, particularly when they reform the basis of the taxation system, and that for substantial changes we usually put in place a significant process of evaluation.

I think that the hon. Gentleman and other Committee members will appreciate that the long-term impact of the sort of changes that have been touched on this morning might take some time to become clear. However, the Inland Revenue's initial evaluation of the company car tax reforms that was published alongside the Budget in 2004 shows that, as far as we can trace and quantify, the tax has had two significant effects, both of which are environmentally beneficial. It has led to a reduction both in the amount of business mileage that is driven and in the carbon dioxide emissions of the company car fleet. Both were key purposes of the reforms. We will monitor the impact of the reform as part and parcel of our evaluation of such tax changes.

In response to the hon. Member for Cities of London and Westminster I say again, clearly and emphatically, that the measure is not designed as a revenue raiser. He asked which vehicles will produce a tax saving for their drivers or for the businesses that have them as part of their fleet. That will depend on the precise details of the design of the scheme, which   we are currently discussing with the industry. If he looks at the structure and design of the scheme that we have put in place for VED—or, indeed, for the company car tax—he will see that it is scaled in a way that gives incentives and signals to encourage people to drive more fuel efficient and less polluting cars. We want the same design for this scheme.

I fear that I would stray beyond the terms of clause 2 were I to get into an exposition of road pricing, but perhaps I can answer the hon. Gentleman's question in the following way. Clause 2 is a further reform that is consistent with and moves in a similar direction to the reforms we made to vehicle excise duty in 2001, company car tax in 2002, and the direct tax fuel scale charge in 2003. Our aim in the detailed design of this scheme and the reforms that we have already put in place is consistency in this part of the tax system—consistency in terms of the signals given to businesses and company car drivers, the incentives that have an impact on behaviour where we can put those in place, and the way in which businesses administer the schemes that we establish.

Clause 2 ordered to stand part of the Bill.