The clause establishes special provision for the tax charge that would otherwise relate to the newly introduced operational allowance, payable to members of the armed forces in certain circumstances. In October, the Secretary of State for Defence announced the introduction of the new operational allowance, which will apply to members of the armed forces serving in specified operational locations such as Iraq, Afghanistan and the Balkans from 6 April 2006. The purpose of the allowance is to recognise the increased and enduring danger in operational locations over and above that which is already compensated for in a service person's salary.

The qualifying areas will be regularly reviewed by the Secretary of State for Defence on advice from the Commander, Joint Operations. That assessment will depend on a review of the nature of the danger to armed forces personnel who are deployed on operations. Any change to the qualifying locations will be approved by Ministers.

The hon. Member for Rayleigh asked me four other questions. The first was how long the allowance would last. It is part of the remuneration package that we judge is appropriate for our armed forces. I explained how the judgment about qualifying areas will be arrived at and that is how it will operate in future.

The hon. Gentleman’s second question was about the exemption—whether the operational allowance is taxed. I can confirm that the exemption will apply retrospectively, and HMRC will not collect tax from any payment of the operational allowance. The third question was about how the Ministry of Defence would treat the allowance in budgeting terms. For the current period after the introduction, the funding comes from the reserve. The MOD Budget is being set for the longer term as part of the comprehensive spending review, and it will form part of those discussions and negotiations.