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

What a pleasure it is to serve under your chairmanship this morning, Sir Roger, after our short break. I welcome the hon. Members for Wolverhampton South West and for Leeds East to the Opposition Front Bench. I hope that they remain there for a long time. I also pay tribute to the work of the hon. Members for Worsley and Eccles South (Barbara Keeley) and for Wirral South (Alison McGovern), who worked so hard in that role before the break.

The changes made by the clause mean that banks will no longer be entitled to tax relief for compensation payments made in relation to their misconduct and mis-selling. That will protect the Exchequer from banks’ past management failures and ensure that the sector makes an appropriate contribution to restoring the public finances.

Let me start by providing some background to the tax rules in this area. Fines are generally treated as non-deductible expenses in calculating companies’ profits liable to corporation tax. That means that the fines imposed on banks as a result of their conduct have had no direct impact on UK tax receipts; in fact, they have actually benefited the Exchequer due to a change in rules enacted by the Government. That is not the case, however, for banks’ customer compensation payments. Such payments are generally treated as deductible expenses for corporation tax purposes, reflecting the fact that they are non-punitive and often the straightforward reimbursement of income on which businesses have already been taxed. As a result, compensation payments made by banks in relation to the mis-selling of financial products have, until this point, impacted directly on corporation tax receipts.

The scale of banks’ compensation payments in recent years has been unprecedented. More than £25 billion has already been paid out or provided for in relation to the mis-selling of payment protection insurance, with a further £1.8 billion paid or provided for in relation to the mis-selling of interest rate products. Crucially, the exceptional levels of banking sector compensation are persisting. New PPI provisions exceeded £2 billion in the first half of 2015 alone, with cumulative provisions now well in excess of initial market expectations and continuing to grow. In that context, the Government  believe that the existing tax rules have become unsustainable. It is not acceptable that post-crisis corporation tax receipts continue to be depressed by conduct failures that in some instances took place more than 10 years ago. The clause therefore makes a change to address that.

The clause makes banks’ compensation payments in relation to misconduct and mis-selling non-deductible for tax purposes from 8 July 2015. That will apply to compensation material enough to have been disclosed in banks’ accounts, albeit with an exclusion for compensation relating to administrative errors, system failures and the actions of unconnected third parties. The changes will also capture administrative expenses associated with that compensation, but will achieve that indirectly by requiring banks to apply a 10% uplift in calculating their non-deductible compensation expenditure. That will help to ensure that the changes are proportionate. It will also ensure that the Exchequer is protected from the large-scale compensation seen in recent years, but in a way that is administrable and recognises that banks, like other industries, will inevitably make compensation payments as part of their ordinary course of business. Overall, this is a fair and workable set of rules, which is forecast by the independent Office for Budget Responsibility to increase banks’ corporation tax payments by £1 billion over the next five years.

We have already taken action to reduce the sensitivity of corporation tax receipts to losses incurred by banks during the crisis. The changes made by clause 18 now do the same in respect of banks’ past misconduct and the exceptional levels of compensation it has given rise to. This is crucial in ensuring that taxpayers get a fair deal from the banking sector, which they stood behind during the crisis. I therefore commend clause 18 to the Committee.

What a pleasure it is to appear in Committee before you, Sir Roger. It has been a good many years. I thank the Minister for her kind words and pay tribute to my predecessors in this role, who worked hard, including on this Finance Bill. It is a particular pleasure to be shadowing the hon. Member for South West Hertfordshire. He and I have crossed swords in previous Committees—it is getting on for 10 years ago. I always think it is a bit like that Texas festival, South by Southwest—we are South West Hertfordshire and Wolverhampton South West. I look forward to our debate.

It will not surprise the Committee, and in particular my hon. Friends, that the Labour party thinks that clause 18 is rather a good idea. I will not detain the Committee for long, but I want to make one point and raise one issue. It was on this very day in 2008 that one of the major banks in this country was nationalised—I believe it was Lloyds bank. I remember, because I remarked in the Commons, as a then Government Back Bencher, that happy days were here again, because we were nationalising a bank on Margaret Thatcher’s birthday. It seems to go with the zeitgeist of the current Labour party leadership.

On that point, I am keen to explore whether the hon. Gentleman supports that leadership.

Order. I am going to throw the hon. Gentleman a lifebelt. That is strictly not part of the Bill.

Thank you, Sir Roger. As a shadow Minister, I think the Minister knows my response.

I have a question for the Minister—one that has just occurred to me, so I hope she will indulge me, as I have not had a chance to research it. The explanatory notes seem to suggest that this clause refer to banking, but the wording seems to suggest that it refers to corporation tax and deductions for compensation. All hon. Members will be aware that the largest car company in Europe—the second largest in the world—has been doing precisely what banks were doing leading up to the crash in 2008. Starting in 2009—which shows that the capitalists never learn and need regulating—the Volkswagen Audi group has been using computer algorithms and deception to con consumers. My personal view is that the Government, with the prosecuting authorities, should look at prosecuting Volkswagen executives if there is a case to answer that they obtained pecuniary advantage by deception—a breach of section 15 of the Theft Act 1968. However, my question for the Minister is this. Would clause 18, on the deductibility or non-deductibility from corporation tax of payments made by cheating companies, cover a company such as Volkswagen if it were adjudicated formally to have cheated?

Let me answer the hon. Gentleman’s question by agreeing that clause 18, given the way it is worded, applies only to banks. Clearly, it was introduced in response to the fact that the scale of bank compensation, to which I referred in my opening remarks, has been so significant. More than £25 billion has already been paid out, which has had a material and meaningful impact on the corporation tax receipts of Her Majesty’s Treasury. We have always been clear that we want banks to make a fair contribution to their historic costs and their potential impact on future risks to the economy.

The hon. Gentleman asked about compensation relating to the Volkswagen emissions scandal, which, as he is right to highlight, is a complete scandal. There is currently no intention to extend this measure. It is obviously early days in terms of the full scale of potential actions regarding Volkswagen, in particular Volkswagen in the UK and where the company pays corporation tax. However, I can assure the hon. Gentleman that the Government reserve the right to act decisively through legislation such as Finance Bills when they need to take steps to protect the public finances.

On a point of clarification, the Minister mentioned that the costs of expenses incurred in addition to fines would also not be tax deductible. As she knows, under a section 166 agreement, the Financial Conduct Authority can ask a bank, at its own expense, to investigate an alleged misdemeanour. As I understand it from what she is saying, if that results in a fine, the section 166 cost is not tax deductible, but what would happen if it did not result in a fine and came off with a negative result? Would the section 166 undertaking be recoverable under tax?

My hon. Friend speaks with great insight and authority from his position on the Select Committee on the Treasury. I can explain to him that these measures are designed to tackle the material costs of compensation that are reflected, or provisioned for,  in a bank’s accounts. In addition to that, a further 10% for the general costs of administration is attached. Were the costs that my hon. Friend refers to significant enough to require provision in the company’s accounts, they would be captured by this measure.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.