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

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

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

We now turn to issues that may be slightly more illuminating for the Committee: in a nutshell, the tax breaks that banks are able to receive. Although the way that is described may seem opaque, we are  looking at a clause that relates to tax relief for the capital instruments that the banks are able to gain as part of the changes in the structure of their balance sheets, prompted by regulatory shifts.

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

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

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

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

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

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

We know that the Government have struggled somewhat with tackling the questions of capital adequacy and leverage in the banking sector. For the banks to be  sufficiently safe after the global financial crisis, we need to ensure that there is a good relationship between the capital adequacy rules and the leverage that banks are able to exercise.

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

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

I was shaking my head not because of the hon. Gentleman’s comment but because of his more general analysis. I thank him for allowing me to put it on the record that that was not my intention.

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

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

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

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

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

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

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

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

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

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

Sitting suspended for a Division in the House.

On resuming—

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

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

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

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

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

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

Amendment 11 asks that the Government publish details of changes to tax revenues and of each other change in respect of the treatment of regulatory capital  requirements and tier one capital. Let me first clarify exactly how banks and other regulatory capital instruments will be treated for tax.

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

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

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

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

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

I am afraid that shows a lack of understanding among the Opposition of how bank capital works. To be clear, all debt instruments issued by banks are tax-deductible for corporation tax purposes.  What is not tax-deductible is shares, or what we might call equity. Equity remains non tax-deductible. Any shares issued by any bank will not be tax-deductible for corporation tax purposes, which is consistent with any other company that might not be a bank.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is important that our constituents get some transparency in understanding how the Treasury is bending over backwards to accommodate the banking  sector as it has on bonuses, as it has on the bank levy, consistently collecting far less than it was supposed to do. When it comes to the tax revenue implications of capital instruments, our constituents need to know the truth about what advantages might be provided not just by the changes in clause 42, but in the associated statutory instruments relating to additional tier one and tier one instruments.

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

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

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

There are not.

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

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

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

Question put, That the amendment be made.

The Committee proceeded to a Division.

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

The Committee having divided: Ayes 12, Noes 17.

Question accordingly negatived.

Clause 42 ordered to stand part of the Bill.

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

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