Clause 117

Finance Bill – in a Public Bill Committee at 1:00 pm on 25th June 2009.

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Removal of reduced rate where targets not met

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

Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Parliamentary Secretary, HM Treasury

Clause 117 is an enabling clause that provides for schedule 59 ,and I think that the meat of the debate will be on that. If the hon. Gentleman wants to make any comments, I am sure that he will be with us then to do so.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

Sorry, I was under the impression that we would take the clause and schedule together.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

Up to now we have been more or less doing that, and I am happy for that to continue if it is more helpful to the Committee.

Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Parliamentary Secretary, HM Treasury

I am sorry, Mr. Atkinson, I did not hear you; I thought that you said clause 117.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

I did. The Minister was not here in the earlier stages. When we have a simple one or two-line clause introducing a schedule, the tradition is to debate the two together, so if the Minister would like to speak to the clause and the schedule, that would be fine.

Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Parliamentary Secretary, HM Treasury

I will broadly introduce the schedule and will then welcome debate.

The climate change agreements scheme is a state aid scheme. It was designed to run for 12 years, until 2013. When the UK notified the scheme as state aid in 2001, we made that clear to the European Commission. However, in accordance with the prevailing Community guidelines on state aid for environmental protection, approval could be given for 10 years only. Therefore, the Government intend to seek a two-year extension to the state aid approval before the current approval expires in 2011.

The scheme is structured around two-year certification periods, within which are 12-month target periods. If a sector passes its targets, all facilities within that sector are certified as entitled to pay the reduced rate for the subsequent two years. If a sector fails to meet its target, facilities within that sector that also fail their individual targets lose their right to the levy reduction for the subsequent two years. Currently, the only consequence of failure, and therefore incentive not to miss targets, is prospective loss of the levy reduction.

A condition of state aid approval for the scheme in 2001 was that for the last two years of the 10-year approval—2009-11—the UK must introduce a mechanism to recover tax from facilities that fail to meet their targets during the period. The recovery of levy must be proportional to the missed targets.

Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Parliamentary Secretary, HM Treasury

I will not give way. The hon. Gentleman asked me to introduce the schedule and he will have ample opportunity to respond.

That requirement reflected the Commission’s concern that the levy relief for 2011-13, which participants would expect to receive for meeting targets during the 2010 target period, falls outside the period of current state aid approval. Consequently, if the UK did not seek, or was unsuccessful in securing, an extension to the state aid approval beyond 2011, it would weaken the incentive for businesses to meet their 2010 targets.

The introduction of the recovery mechanism represents a fundamental change to the scheme. The Government are introducing the necessary legislation now to ensure that participating facilities are aware of the new consequence of missing their targets before those targets are agreed with the DECC later this year.

Schedule 59 introduces a mechanism to enable HM Revenue and Customs to recover the climate change levy from facilities that fail to meet the agreed targets and are in sectors that miss their sector targets for the same period, proportionate to the facility’s extent of shortfall against their target or targets. I will leave it there and let the hon. Gentleman come back with his comments and questions.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I apologise for trying to intervene but I was confused about one point. It may be a misunderstanding, but my information is that we are talking about a 10-year process, which ends in 2011. I think that the Minister said that it was a 12-year process, also ending in 2011. To rephrase that as a question: did the process start in 1999 or 2001? We seem to agree that it ends in 2011.

As the Minister says, the measure is being introduced due to state aid rules. As I understand it, a condition for the Government receiving state aid approval is that for the last two years of the 10-year approval, a mechanism must be in place to receive tax from facilities that failed to meet their target as set out under the particular CCA. The tax is proportional to the extent that the targets are missed.

I was of the view that the recovery mechanism applies to certification schemes beginning on or after 1 April 2009 because the last two years of the 10-year period run from April 2009 to 31 March 2011. As the Minister said, the measure will be a further incentive for businesses to meet their CCA targets because they will incur a financial cost if they fail to do so. However, she did not mention that it will introduce a further level of complexity to the administration of the climate change levy. Businesses will have to consider the potential implications of this measure when they negotiate their climate change agreements and energy consumption targets.

Will the Minister clarify whether we are talking about a 10-year or a 12-year period? What consultation was undertaken prior to the introduction of the measure? What studies have been done of the cost of the new measure compared with the tax that it is predicted to raise?

Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Parliamentary Secretary, HM Treasury

I confirm that climate change agreements were introduced in 2001. We intended for there to be a 12-year scheme that ran until 2013, but under the guidelines, approval could be given for only 10 years. We will seek state aid approval for the final two years of the scheme because we intended it to go up to 2013. It was announced in the 2007 pre-Budget report that the Government intend to extend the climate change agreements scheme until 2017. That, too, is subject to further state aid approval being secured.

I shall explain how the mechanism will work. The DECC will notify Revenue and Customs when a facility meets the criteria. Revenue and Customs will then inform the facility that repayment of the levy is required and confirm the amount that is due.

Sector associations involved in climate change agreements have been consulted informally by the DECC about the new provision. The sectors accept that this action, which is taken to ensure that the UK complies with its state aid obligations, will enable the climate change agreement scheme to continue, along with the corresponding entitlement to claim the levy reduction. They understand that, based on performance against targets in the last target period, the recovery of levy is likely to apply for a limited number of the 10,000 or so facilities in the scheme—about a quarter of 1 per cent. There has been no impact assessment of this measure because the administrative impact on the voluntary and private sectors and on Government will be negligible.

Question put and agreed to.

Clause 117accordingly ordered to stand part of the Bill.

Schedule 59 agreed to.