David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

Sir Nicholas, I welcome you to the Chair this afternoon. I shall begin my brief remarks on clause 14 and schedule 6 on a note of consensus. I, too, agree with the Exchequer Secretary that it is a pity that the weather is so gloomy on the first day of the Test series, although I recall that the weather in the fine county of Cheshire yesterday was glorious.

Clause 14 and schedule 6 relate to the taxation of aviation gasoline, of the fuel used for private pleasure flying and of the fuel used in private pleasure craft. There are two areas that I would like to ask the Minister about. First, we recognise that the Government’s hand has been forced in the case of private pleasure flying, by the fact that various derogations held with the EU have not been extended. The Government, particularly with red diesel for private pleasure craft, sought to extend that derogation, and it is regrettable that that has not been achieved.

The Government have adopted a free-standing duty rate for avgas, which appears to be widely welcomed by the industry. The rate is 31.03p per litre and I would be grateful to know if that was the minimum level allowed under EU rules. I know also that representations were made that there should be exemptions, for flying emergency  vehicles, for example, and that the Government’s position is somewhat restricted. In particular, will air ambulances pay the duty? Will vintage aircraft be exempt? There are still aircraft from the second world war flying. Will flight training be exempt? I would be grateful to know the Government’s position on those.

The Government are consulting on aviation duty. The proposals set out in schedule 6 and clause 14 will come into effect on 1 November this year, but new aviation duty may come into effect on 1 November 2009. Therefore, is it likely that we will revisit this area next year and that what we put in place now will only last for 12 months and then we will have a new regime?

I now turn to the issue of red diesel for private pleasure craft. I declare an interest in that the Grand Union canal runs through my constituency. This Saturday, I will be opening the Rickmansworth canal festival, an event that I can recommend to anyone who would like a fun day out. [Interruption.] Alternatively, one could watch the test match, but I will certainly be at the Rickmansworth canal festival.

Clearly, red diesel has been a concern for boaters, whether inland or otherwise. The Government’s original proposals suggested that private pleasure craft would be required to fit additional fuel tanks, but that is no longer the case. Although it is regrettable that the derogation was not extended, the Government have, in all fairness, taken quite a reasonable approach. If they had pursued their original proposals, one implication would have been that craft would have to have had two fuel tanks fitted. There was certainly an issue about whether operators would want to provide two sorts of fuel in more remote areas, with the result that private pleasure craft would not be able to visit such areas. The alternative approach is therefore welcome, but I would like to ask some questions about it.

Under the current approach, boat users must self-certify that they are non-commercial and they must distinguish between fuel for propulsion and fuel for heating, lighting and so on. On propulsion, the estimate in the Treasury’s impact assessment is that the price of gas oil could more than double. I would be grateful to know whether the Government still agree with that assessment, given the changes that we have seen in fuel prices in recent months.

I would be grateful for clarification of the distinction between propulsion and domestic use—heating, lighting and so on. Will that be made purely on the basis of self-certification, or will a standard percentage be used, as has been suggested?

I would also be grateful for confirmation that the European Commission has accepted the proposals and that the proposed route forward will not cause further difficulties. Similarly, will there be any difficulties with other member states not recognising the continued use of red diesel? That concern was raised in the consultation.

Her Majesty’s Revenue and Customs has made no estimate of the cost of increased enforcement. Given that we will rely heavily on self-certification, will there not be a need to enforce the arrangements and perhaps do spot checks? I would be grateful to know the Government’s position on that.

Finally, I want to raise a point that struck me as I read the impact assessment. The Exchequer will raise between £10 million and £15 million a year, depending  on the balance between propulsion and domestic use, and I understand why there would be that range of uncertainty. However, there are also figures for the reduction in fuel used for propulsion for the purposes of calculating the carbon reduction. The figures range from 10 to 30 per cent., with the central forecast therefore being 20 per cent. In evaluating the carbon reduction, the Government appear, entirely reasonably, to be making a dynamic assessment—that if they put up the duty, less fuel will be used, with the central projection being a 20 per cent. reduction.

Have the Government undertaken the same assessment in calculating the Exchequer costs and therefore assumed a 20 per cent. reduction in use as a consequence of their proposals? If they have, that is entirely reasonable, although there is evidence of a dynamic effect. If they have not, why not, given that they have taken account of a dynamic effect in relation to the same tax in a different context? If the Treasury does take account of the dynamic effect on this tax, does it do so on other issues? I would be grateful if the Exchequer Secretary could answer those questions.

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour)

I must confess to experiencing a slight tinge of envy when the hon. Member for South-West Hertfordshire talked about the great event on the Grand Union canal this weekend. I used to be the Minister responsible for canals. One misses some certain things about one’s previous jobs—certainly being able to leap on a narrowboat and steer it through a few locks, which I did on occasion. I am slightly envious of how the hon. Gentleman will spend his weekend.

I am happy to do my best to answer some of the hon. Gentleman’s perfectly reasonable questions on clause 14. He is right—and I thank him for acknowledging it— that it was not the Government’s wish to be in a situation in which we had to deal with the ending of derogation for such fuel, but we reached the stage at which the European Commission would not allow the derogation to continue.

Clause 14 introduces changes in response to the loss of the UK’s energy products directive derogation and provides for free-standing rate of duty for aviation gasoline which, as the hon. Gentleman rightly said, is known as avgas, with effect from 1 November 2008. It also introduces schedule 6, which makes provision for charging duty on

“fuel used for private pleasure flying or private pleasure craft”

and for a partially-rebated rate of duty on heavy oil other than kerosene, which is a nil-rated oil because it is used for heating—hence the issue of propulsion and heating about which the hon. Gentleman asked.

Under energy tax directive 2003/96/EC, which is also known as the energy products directive, fuel used for pleasure flying and in private pleasure aircraft must be taxed at the full rate that member states charge on the equivalent fuel, and waste oil that is re-used as fuel must be charged with duty at the rate that member states charge on the equivalent heating fuel. The UK held derogations—[Interruption.]

Nicholas Winterton (Macclesfield, Conservative)

Order. If the Government Whip wishes to negotiate with the Scottish National Party, he should do so outside the Committee Room.

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour)

Sir Nicholas, I was trying to earwig on that conversation as well. It was rather intriguing.

The UK held derogations permitting the application of exempt or reduced rates of duty of fuels used for those purposes. Unfortunately, they expired on 31 December 2006, and our applications for renewal were turned down. Consequently, the new free-standing duty rate on avgas set independently from other duties will be the rate that applies when the free-standing rate is introduced on 1 November. The current rate for avgas, which is set at half the rate for leaded petrol, is 30.03p per litre. The date of introduction coincides with the implementation of schedule 6.

The hon. Gentleman asked whether it was the minimum level allowed under EU rules. I can confirm that it is. He also asked about exemptions, particularly for emergency flying vehicles and vintage aircraft. The new regime applies only to private flying, so air ambulances and so on are not covered. We are considering in more detail the position of training flights, which he mentioned. I cannot usefully add anything on that, but I am sorry to disappoint him that there are no exemptions for fuel used in vintage aircraft.

The hon. Gentleman asked how the new rates might interact with the planned introduction of the new aviation duty in November 2009. The interaction with the new aviation duty will be considered fully as the details of that new tax are finalised. That issue is under consideration by the Government. He asked about fuel use for domestic purposes, which does not have to be charged at the full duty rate. We are talking about the difference between the purpose of heating and the purpose of propulsion. An allowance will be made for fuel used for domestic purposes, which will continue to be supplied at the rebated rate, because there is a zero rate for heating. Her Majesty’s Revenue and Customs will discuss appropriate allowances with representatives of the boating industry.

The work done on designing and introducing the new rates has been accompanied throughout by consultation of all the industry bodies to ensure that we are as aware as possible of the details and the technical problems that may arise. I have the impression that there has been good co-operation between HMRC and the industry representatives during the consultation. We have tried to make the introduction of the rates as technically effective as possible, with the least number of unintended consequences, and I hope that we can show that we have done that.

On the possibility of the EU not being happy with the way in which we have ended the derogation and introduced the new rates, there is no reason for the Commission to challenge our new arrangements. The Commission always keeps a close eye on what member states are doing, so I cannot say that there will be no objections, but we are not expecting objections, as we have ended the derogation as it asked and put in place systems that enable us to comply with the appropriate directive.

The self-certification approach raised a few eyebrows, but HMRC’s enforcement effort has to be proportionate to the risk, and this is quite a small area for fuel sales. In the context of the total yield of £24 billion from oil, use in private pleasure craft would account for—get ready for this—0.06 per cent. of the total revenue. The chief risks arise both from pleasure craft owners misleading  suppliers about the nature of their boat, whether it is commercial or domestic, and inflating their entitlement to fuel supplied for domestic purposes, and from those who supply the fuel failing to submit returns or pay the revenue that they collect.

For aircraft, the only risk is that flyers will fail to declare any duty on fuel use for private pleasure flying, but the revenue risk is considered negligible, as private pleasure flying use of avtur—aviation turbine fuel—is estimated to be a fraction of 1 per cent. of the avtur that is used in the industry. HMRC will not give a free hand, but it will approach the paying of duty according to a risk-based assessment. That does not mean that if there are obvious examples of deliberate evasion of the duty, action will not be taken, but I hope that it gives the hon. Gentleman an insight into our approach.

On the 20 per cent. reduction in use deployed in calculating the cost, which the hon. Gentleman also mentioned, it is difficult to project the impact, especially when taking into account the concession on fuel for domestic purposes, because we do not quite know how that will work out. It will mitigate the impact to some extent, but that is a best guess. Clearly, the way in which it develops will be taken into account in refining the assessments of cost in the future. I hope that, with those responses to the hon. Gentleman’s quite reasonable questions, the Committee will be happy to pass clause 14 and schedule 6.